THE IMPLICATIONS OF REFINERY CLOSURES FOR

U.S. HOMELAND SECURITY AND CRITICAL INFRASTRUCTURE SAFETY

FIELD HEARING
BEFORE THE

SUBCOMMITTEE ON
COUNTERTERRORISM
AND INTELLIGENCE
OF THE

COMMITTEE ON HOMELAND SECURITY

HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
MARCH 19, 2012

Serial No. 11276

Printed for the use of the Committee on Homeland Security

Available via the World Wide Web: http://www.gpo.gov/fdsys/

U.S. GOVERNMENT PRINTING OFFICE
76603 PDF

WASHINGTON

2013

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 5121800; DC area (202) 5121800
Fax: (202) 5122250 Mail: Stop SSOP, Washington, DC 204020001

COMMITTEE ON HOMELAND SECURITY

PETER T. KING, New York, Chairman
BENNIE G. THOMPSON, Mississippi
LAMAR SMITH, Texas
LORETTA SANCHEZ, California
DANIEL E. LUNGREN, California
SHEILA JACKSON LEE, Texas
MIKE ROGERS, Alabama
HENRY CUELLAR, Texas
MICHAEL T. MCCAUL, Texas
YVETTE D. CLARKE, New York
GUS M. BILIRAKIS, Florida
LAURA RICHARDSON, California
PAUL C. BROUN, Georgia
DANNY K. DAVIS, Illinois
CANDICE S. MILLER, Michigan
BRIAN HIGGINS, New York
TIM WALBERG, Michigan
CEDRIC L. RICHMOND, Louisiana
CHIP CRAVAACK, Minnesota
HANSEN CLARKE, Michigan
JOE WALSH, Illinois
WILLIAM R. KEATING, Massachusetts
PATRICK MEEHAN, Pennsylvania
KATHLEEN C. HOCHUL, New York
BEN QUAYLE, Arizona
JANICE HAHN, California
SCOTT RIGELL, Virginia
VACANCY
BILLY LONG, Missouri
JEFF DUNCAN, South Carolina
TOM MARINO, Pennsylvania
BLAKE FARENTHOLD, Texas
ROBERT L. TURNER, New York
MICHAEL J. RUSSELL, Staff Director/Chief Counsel
KERRY ANN WATKINS, Senior Policy Director
MICHAEL S. TWINCHEK, Chief Clerk
I. LANIER AVANT, Minority Staff Director

SUBCOMMITTEE ON COUNTERTERRORISM AND INTELLIGENCE

PATRICK MEEHAN, Pennsylvania, Chairman
PAUL C. BROUN, Georgia, Vice Chair
BRIAN HIGGINS, New York
CHIP CRAVAACK, Minnesota
LORETTA SANCHEZ, California
JOE WALSH, Illinois
KATHLEEN C. HOCHUL, New York
BEN QUAYLE, Arizona
JANICE HAHN, California
SCOTT RIGELL, Virginia
VACANCY
BILLY LONG, Missouri
BENNIE G. THOMPSON, Mississippi (Ex Officio)
PETER T. KING, New York (Ex Officio)
KEVIN GUNDERSEN, Staff Director
ZACHARY D. HARRIS, Subcommittee Clerk
HOPE GOINS, Minority Subcommittee Director

(II)

CONTENTS
Page

STATEMENTS
The Honorable Patrick Meehan, a Representative in Congress From the State
of Pennsylvania, and Chairman, Subcommittee on Counterterrorism and
Intelligence:
Oral Statement .....................................................................................................
Prepared Statement .............................................................................................
The Honorable John Carney, a Representative in Congress From the State
of Delaware ...........................................................................................................
The Honorable Michael G. Fitzpatrick, a Representative in Congress From
the State of Pennsylvania ....................................................................................
The Honorable Brian Higgins, a Representative in Congress From the State
of New York, and Ranking Member, Subcommittee on Counterterrorism
and Intelligence:
Prepared Statement .............................................................................................

1
4
6
7

WITNESSES
PANEL I
Mr. Howard Gruenspecht, Acting Administrator, Energy Information Administration, Department of Energy:
Oral Statement .....................................................................................................
Prepared Statement .............................................................................................
Mr. Brandon Wales, Director, Homeland Infrastructure Threat and Risk
Analysis Center, Department of Homeland Security:
Oral Statement .....................................................................................................
Prepared Statement .............................................................................................

9
11
14
16

PANEL II
Mr. Charles Drevna, President, American Fuel and Petrochemical Manufacturers:
Oral Statement .....................................................................................................
Prepared Statement .............................................................................................
Mr. Robert Greco, Group Director, Downstream and Industry Operations,
American Petroleum Institute:
Oral Statement .....................................................................................................
Prepared Statement .............................................................................................

(III)

30
32
39
40

THE IMPLICATIONS OF REFINERY CLOSURES

FOR U.S. HOMELAND SECURITY AND CRITICAL INFRASTRUCTURE SAFETY
Monday, March 19, 2012

U.S. HOUSE OF REPRESENTATIVES,

COMMITTEE ON HOMELAND SECURITY,
SUBCOMMITTEE ON COUNTERTERRORISM AND INTELLIGENCE,
Aston, PA.
The subcommittee met, pursuant to call, at 10:11 a.m., in the
Mirenda Center for Sport, Spirituality, and Character Development
at Neumann University, One Neumann Drive, Aston, Pennsylvania, Hon. Patrick Meehan [Chairman of the Subcommittee] presiding.
Member present: Representative Meehan.
Also present: Representatives Carney and Fitzpatrick.
Mr. MEEHAN. The Committee on Homeland Security, Subcommittee on Counterterrorism and Intelligence will come to order.
The subcommittee is meeting today to hear testimony regarding
the implications that refinery closures have on homeland security
and critical infrastructure safety.
First, I would like to thank everybody including the witnesses for
attending this morning. I appreciate the effort that has been taken
on behalf of all of those involved to have this important field hearing. This is an official Congressional hearing as opposed to a town
hall meeting, and as such, we must abide by certain rules on the
Committee of Homeland Security and the House of Representatives, and I kindly wish to remind our guests today that demonstrations from the audience, although I suspect and know that
you will be behaved, including applause and outbursts, as well as
those of other decorum issues, would be the same as if we were in
the House of Representatives, so I ask that you keep those an appropriate control as it is important that we respect the decorum
and rules of the committee. I have also been requested to state that
according to those rules, photography and cameras are limited to
accredited press only.
Now that we have those housekeeping issues behind us, before
we begin, I would like to ask unanimous consent that Congressman
Mike Fitzpatrick from Pennsylvanias 8th Congressional District
and Congressman John Carney of Delaware be permitted to participate in todays hearing. Although they do not sit fully as Members
of the Homeland Security Subcommittee, they have requested and
I am very, very grateful to have their participation here today on
(1)

2
this committee, and Congressman Fitzpatrick spoke to me just a
few minutes ago, and here he is. He has just arrived.
I would also like to express my deep appreciation to President
Rosalie Mirenda and the family here at Neumann University for allowing us to take advantage of this beautiful facility, and I guess
it is the right time of year to be in a basketball court, but I am
thankful for all of their hospitality, and I know that President
Mirenda considers herself a real neighbor to the area, which is so
dramatically affected by the proposed closings. So what I would
like to do is reserve myself a moment to make an opening statement.
I would like to welcome everyone to todays Subcommittee on
Counterterrorism and Intelligence field hearing. I look forward to
hearing from todays witnesses on the impact the refinery closures
will have on the security of our critical infrastructure and the continued safety of the homeland. This issue is not only important locally but the closure of these refineries will have powerful repercussions for the entire Northeast region and the entire country. For
these reasons, I am glad to have todays witnesses to delve deeper
into these issues and to determine the potential vulnerabilities in
the event of a terrorist attack or a natural disaster.
At todays hearing, I hope to gain answers to the following critical questions. What are the reasons that refineries are closing in
the United States? If the Northeast is the largest gasoline market
in the United States, why are particularly East Coast refineries
being closed? What are the consequences of the recent refinery closures in the Northeast on the immediate and long-term oil supply?
How will these resulting shortages be addressed? What are the security issues raised by greater reliance on pipelines, shipping, and
rail for product delivery to the Northeast? What are the National
security implications if the loss of refining capacity and expertise
that we have here in the United States is allowed to dwindle?
What is being done to address those security issues and stresses
on our critical infrastructure systems?
As we all well know at the local level, the decline of domestic regional refining in our Nation is alarming, and in my view will affect our National and homeland security. On September 6, 2011,
Sunoco announced that they would be idling their Marcus Hook
and Philadelphia refineries by July 1, 2012, if a buyer could not be
found. Just 3 weeks later, ConocoPhillips announced that they
planned to idle and sell their refinery in Trainer, Pennsylvania.
These three area refineries represent 50 percent of the total East
Coast refining capacity. If the recent decision to close the
HOVENSA facility in St. Croix is included, these closures represent
a production loss of more than 1 billion barrels a day from our region.
The economic impact of these closures is obvious and devastating. Our local workforce is among the best in the world with
a demonstrated record of excellence and safety. Thousands will lose
their jobs. Some already have.
As a lifelong resident of the greater Philadelphia area, I know
the role that the refineries have played, a major role in our local
economy. Our family and friends work at the refineries and support
local businesses. Moving forward, our entire delegation remains

3
committed fully to helping secure a buyer so that these facilities
can continue operations, but as we deal with the local implications,
it is proper to ask: What is the impact of disruptions to oil distribution systems, particularly natural disasters like hurricanes or
earthquakes? The Gulf Coast is the largest supplier of domestic refined products and a major source of important crude for the
United States.
Our country relies on a complex and modern infrastructure system to distribute energy domestically. This reliance is critical to delivering necessary supply to meet demand in the Northeast as well
as in all regions of our country. Any minor disruption in this system can create major problems for many of the very things that we
depend on every day, from heating our homes to fueling our vehicles. A major disruption can cause serious issues for our Nation
and our security.
If a buyer is not found for the Philadelphia refinery and the facility is closed, over half the refining capacity in the Northeast will
be removed in a span of only 6 months. I have serious concerns as
to how much stress this puts on the current infrastructure system
and the increased risk in the event of a natural disaster, terrorist
attack, or other geopolitical event.
After Hurricanes Katrina and Rita hit the Gulf Coast, we witnessed just how vulnerable the reliance on the Gulf Coast and
pipeline infrastructure for energy supplies can be. Five days after
Hurricane Katrina struck, the U.S. Minerals Management Service
reported that 8812 percent of Gulf crude oil production was shut
down or off-line. This amounted to 25 percent of the total Federal
off-shore crude production, leaving many platforms evacuated or
destroyed. Less than a month later, Hurricane Rita made landfall
in the Gulf, resulting in significant damage. The cumulative effect
of these two storms resulted in the temporary suspension of operations at 10 refineries, a loss of over 2 million barrels per day from
the market, and significant pipeline disruption. The Colonial pipeline, a critical artery for the Northeast to receive our refined fuel
products from the Gulf, was temporarily closed, along with Capline
and Plantation pipelines.
Of similar concern is the threat to oil facilities from acts of terrorism. Since the September 11, 2001, terrorist attacks, there has
been great concern about the security of the Nations critical infrastructure including oil refineries and pipelines. Al-Qaeda and its affiliate networks have previously expressed interest in attacking
critical infrastructure in the homeland including oil and gas facilities. Last year, the Department of Homeland Security and the FBI
warned State and local police across the United States that alQaeda has a continued interest in attacking oil and natural gas
targets. In fact, this information came directly from intelligence
that was seized during the raid of Osama bin Ladens compound
in Abbottabad. Al-Qaeda targeting the oil infrastructure has long
been a part of the al-Qaeda playbook.
In 2002, the group claimed responsibility for the bombing of a
French oil supertanker off the coast of Yemen. In a brazen February 2006 operation, al-Qaeda attacked the Abqaiq facility in eastern Saudi Arabia. The facility is one of the worlds largest and it
produces 13 million barrels of oil per day. Although the damage in-

4
flicted by the attack was quickly contained, the mere news of an
attack pushed oil prices up by $2. Perhaps more significantly, experts believe that attacks on oil and gas infrastructure could be an
increasingly common likelihood as al-Qaeda changes its target set
to an area that would garner the most attention and inflict the
most damage on the United States economy. Relatedly, the Department of Homeland Security recently warned about cyber attacks
against the oil and gas sectors by the hacker group Anonymous.
In closing, the threat to our energy distribution system is very
real. Accidents, natural disasters, and terrorist attacks have proven
to disrupt oil facilities operations in the past. I expect that they
will also do it in the future. That is partly why I am concerned
about further pressuring our delivery systems to accommodate in
the event of Philadelphia refinery closures.
I look forward to hearing from todays witnesses on how these
closures will impact the region and the country and how we can
provide for the continuing security of our oil distribution systems
and the safety of our homeland.
[The statement of Mr. Meehan follows:]
PREPARED STATEMENT

OF

CHAIRMAN PATRICK MEEHAN

MARCH 19, 2012

I would like to welcome everyone to todays Subcommittee on Counterterrorism
and Intelligence field hearing.
I look forward to hearing from todays witnesses on the impact the refinery closures will have on the security of our critical infrastructure and the continued safety
of the U.S. Homeland.
This issue is not only important locally but the closure of these refineries will
have powerful repercussions for the entire Northeast region and the entire country.
For these reasons, I am glad to have todays witnesses to delve deeper into these
issues and to determine the potential vulnerabilities in the event of a terrorist attack or a natural disaster.
IMMEDIATE QUESTIONS ON REFINERY CLOSURES

At todays hearing, I hope to gain answers to the following critical questions:

What are the consequences of the recent refinery closures in the Northeast on
immediate and long-term oil supply?
How will the resulting shortages be addressed?
What are the security issues raised by greater reliance on pipelines, shipping,
and rail for product delivery to the Northeast?
What is being done to address those security issues and stresses on our critical
infrastructure systems?
BACKGROUND INFORMATION ON THE ISSUE

As we all well know at the local level, the decline of domestic regional refining
in our Nation is alarming, and in my view, will affect our National and homeland
security.
On September 6, 2011, Sunoco, Inc. announced that they would be idling their
Marcus Hook and Philadelphia refineries by July 1, 2012, if a buyer could not be
found. Just 3 weeks later, ConocoPhillips announced that they planned to idle or
sell their refinery in Trainer, Pennsylvania.
The economic impact of these closures is obvious. Our local workforce is among
the best in the world with a demonstrated record of excellence and safety.
As a lifelong resident of the greater Philadelphia area, I know the refineries have
played a major role in our local economy. Our family and friends work at the refineries and support local business.
Moving forward, I remain fully committed to helping secure a buyer so these facilities can continue operations.

5
IMPACT OF DISRUPTIONS TO OIL DISTRIBUTION SYSTEMS

The Gulf Coast is the largest supplier of domestic refined products and a major
source for imported crude for the United States. Our country relies on a complex
and modern infrastructure system to distribute energy domestically. This reliance
is critical to delivering necessary supply to meet demand in the Northeast, as well
as in all regions of our country. Any minor disruption in this system can create
major problems for many of the very things that we depend on every day from heating our homes to fueling our vehicles. A major disruption can cause serious issues
for our Nation and our security.
If a buyer is not found for the Philadelphia refinery, and the facility is closed, over
half of the refining capacity in the Northeast will be removed in a span of only 6
months. I have serious concerns as to how much stress this puts on the current infrastructure system and the increased risk in the event of a natural disaster, terrorist attack, or other geopolitical event.
After Hurricanes Katrina and Rita hit the Gulf Coast, we witnessed just how vulnerable the reliance on the Gulf Coast and pipeline infrastructure for energy supplies can be.
Five days after Hurricane Katrina struck, the U.S. Minerals Management Service
(MMS) reported that 88.5 percent of Gulf crude oil production was shut-in, or offline. This amounted to 25 percent of the total Federal offshore crude production,
leaving many platforms evacuated or destroyed.
Less than a month later Hurricane Rita made landfall in the Gulf resulting in
significant damage. The cumulative effect of these two storms resulted in the temporary suspension of operations at 10 refineries, a loss of over 2 million barrels per
day from the market, and significant pipeline destruction. The Colonial pipeline, an
artery for the Northeast to receive our refined fuel products from the Gulf, was temporarily closed, along with Capline and Plantation pipelines.
THE THREAT TO OIL FACILITIES FROM ATTACKS

Since the September 11, 2001 terrorist attacks, there has been great concern
about the security of the Nations critical infrastructure, including oil refineries and
pipelines.
Al-Qaeda and its affiliate networks have previously expressed interest in attacking critical infrastructure in the homeland, including oil and gas facilities.
Last year, the Department of Homeland Security and the FBI warned State and
local police across the United States that al-Qaeda has a continuing interest in
attacking oil and natural gas targets. In fact, this information came directly from
intelligence seized during the raid on Osama bin Ladens compound in Abbottabad,
Pakistan. Al-Qaeda targeting of oil infrastructure has long been a part of the alQaeda playbook.
In 2002, the group claimed responsibility for the bombing of a French oil supertanker off the coast of Yemen.
In a brazen February 2006 operation, al-Qaeda attacked the Abqaiq facility in
Eastern Saudi Arabia. This facility is one of the worlds largest and produces 13 million barrels of oil per day.
Although the damage inflicted by the attack was quickly contained, the mere
news of an attack pushed oil prices up by $2. Perhaps more significantly, experts
believe that attacks on oil and gas infrastructure could be an increasingly common
likelihood, as al-Qaeda changes its target set to an area that will garner the most
attention and inflict the most damage on the U.S. economy.
Relatedly, the Department of Homeland Security recently warned about attacks
against the oil and gas sector by the hacker group Anonymous.
CLOSING

The threat to our energy distribution system is very real. Accidents, natural disasters, and terrorist attacks have proven to disrupt oil facilities operations in the
past. I expect they will also do so again in the future.
That is partly why I am so concerned about further pressuring our delivery systems to accommodate for the Philadelphia refinery closures.
I look forward to hearing from todays distinguished witnesses on how these closures will impact the region and the country, and how we can provide for the continued security of our oil distribution systems and the safety of our homeland.

Mr. MEEHAN. At this point in time, I would like to recognize the

gentleman from Delaware, Mr. Carney, for any statement that he
may have.

6
Mr. CARNEY. Thank you very much, Congressman Meehan. It is
a privilege to have the opportunity to join you and Congressman
Fitzpatrick at this field hearing today for the U.S. Homeland Security and Critical Infrastructure Safety Committee. I want to thank
you for obtaining unanimous consent, which I know is required of
the committee for a Member of the House who is not on the committee to participate, and I know that that is not always easy, particularly even getting the votes from your own side.
But this is an issue that you and I, Congressman Fitzpatrick and
the rest of our regional delegation including Congresswoman
Schwartz, Congressman Brady, and Congressman Fattah have
been working on since the news broke several months ago, and our
efforts have been really fairly simple, and that is to work with refineries, their employees, and other interested parties in keeping
these facilities open and operating. Those efforts have included
meeting with prospective buyers trying to sort out some of the
issues that we are going to delve into today in terms of the reasons
that the refineries are closing and are finding themselves non-competitive in the global oil markets and those are some of the questions that I have today.
But our goal throughout has been really pretty simple. This, I
think, is a different attack really to the problem as we look at trying to sort through some of these issues, and some of the issues
that you identified in your opening statement in terms of the reasons that the East Coast refineries in particular are closing. We
had the misfortune down the road in Delaware of having the Delaware City refinery close for some time and then be reopened. Of
course, we have had long discussions about how that experience
may apply up here in southeastern Pennsylvania.
I am interested in hearing about what drives pricing and what
drives the ability of refineries to make a profit. Sunoco leaders
have told us for some time that they have been losing large
amounts of money on a monthly basis, and of course, my constituents just see the price at the pump going up and dont quite understand how that doesnt flow through to the refinery and the folks
that work there.
I am particularly concerned, as you are, Congressman Meehan,
about the effects of a shutdown like this or reduced refining capacity in our region on our economic assets in this region and on price
stability for our consumers, our constituents, and the businesses
that we represent.
All the industries that I talk to, and I know that my colleagues
talk to, tell me today that the most important component of being
successful is quality of the workforce. We know here that for generations of families in the area where I grew up in Claymont, Delaware, and other places in New Castle County and of course here
in Pennsylvania have manned those facilities with a quality workforce that is necessary to get the job done. It is disturbing to see
these refineries at risk when we know that the work there is being
done by a quality workforce.
One of the other issues that you identified, Mr. Chairman, in
your opening statement is the fact that our region, if and when
these refineries close, will depend then on the logistics of pipelines
and ships moving product in and out of our region and that raises

7
questions about the security of those logistics to attack by terrorist
groups and others.
So I want to just close by thanking you again for including me
in this field hearing, for getting the approval to have the hearing
in the first instance, and I look forward to having a dialog with the
experts, and I want to thank the witnesses for coming. It is a lot
more difficult, I am sure, for you to get here maybe than it would
be to get to our hearing rooms on the Hill. It is a hell of a lot easier
for me to get here from Wilmington than it is to get to the District
of Columbia.
So thank you very much and I look forward to our discussions
this morning.
Mr. MEEHAN. Thank you, Mr. Carney.
Now I would also like to turn to our colleague in the House, the
gentleman from Pennsylvanias 8th Congressional District, Mr.
Fitzpatrick, for any opening comments he may have.
Mr. FITZPATRICK. Good morning, and I would like to thank the
Chairman, Mr. Meehan, for convening this critically important
hearing here in Pennsylvania and this part of the country and for
inviting Representative Carney and me also the opportunity to be
here to listen to these witnesses and to ask the questions that really are on the minds of so many Americans.
The rising cost of energy of course is dominating the headlines
and impacting so significantly our budgets, our business budgets,
and our family budgets, demonstrating, I think, for all of us how
economic security, energy security, and National security are all
really inextricably intertwined in this industry.
There were riots because of rising fuel prices back in the late
1970s. I remember 1979 when I was growing up in Bucks County,
some of the first gas riots occurred in the Five Points section of
Levittown, my hometown in southeastern Pennsylvania, and it was
a very difficult time in our Nations history, but to put things in
perspective, in 1979, the price of a gallon of gas was 85 cents,
which adjusted for inflation to todays numbers, that would be
$2.50 a gallon, and I noticed over the weekend we are getting very
close now to $4 a gallon, todays numbers.
So this is a very timely hearing. This is an important hearing,
and it is important, as I said, not just for family budgets and business budgets but for our National security and for, you know, not
to forget the important issue of jobs in southeastern Pennsylvania,
especially in this region.
So Congressman, thanks for convening the hearing and for letting us participate.
Mr. MEEHAN. Thank you, Mr. Fitzpatrick.
Other Members of the committee who are not here today but who
may wish to submit opening statements, they may be submitted for
the record.
[The statement of Ranking Member Higgins fllows:]
PREPARED STATEMENT

OF

RANKING MEMBER BRIAN HIGGINS

I would like to thank the Chairman for holding a hearing on this very important
matter. This is a matter that impacts not only the Chairmans district, but also the
entire Northeast, including Western New York. That is why I am very interested
in todays topic and the testimony that will be presented.

8
Northeastern oil refineries supply about 40% of the regions gasoline, 60% of the
regions Ultra Low Sulfur Diesel, and 45% of its heating oil. Replacing this regions
supply demand with additional domestic and foreign imports could pose logistical
challenges. I hope that testimony will indicate what these challenges are and how
this region can handle them. Further, will these challenges cause the price of gasoline and heating oil products to increase?
What are the other options for getting oil to this area? Are the ports in this area
equipped to both handle crude oil? Are any nearby ports able to handle waterborne
oil products? Even if there are ports that can handle waterborne oil products, will
there be an ability to inject oil into the pipelines used by the refineries?
Furthermore, we also need to look at the security issues involved in relying on
cargo ships and pipelines to supply oil to this region. We know that before his death,
Osama Bin Laden asked al-Qaeda operatives to target pipelines, oil tankers, and
dams in the United States. Since bin Ladens death, however, is this still a threat?
What exactly are the Department of Homeland Security and the Department of
Transportation doing to ensure that these pipelines are not vulnerable to terrorist
attacks?
In addition to terrorist attacks, what are the Department of Homeland Security
and the Department of Transportation doing to ensure that in the event of a natural
disaster, oil will reach the Northeast if the Pennsylvania refineries are closed? After
Hurricanes Katrina and Rita, we witnessed just how vulnerable these pipelines can
be. We need to know how to be prepared in the event of a natural disaster.
All in all, we also need to realize the reality of this situation. There are ordinary,
everyday people involved in these decisions to close the refineries. Not only will the
closures affect the thousands of people that work in this area, but also the closures
will affect the people of the Northeastern region. The people that want to drive or
heat their homes this fall. However, according to the Energy Information Administration, until companies know whether or not the Sunoco plant will close they are
not planning to make significant investments in new logistical arrangements. Not
having logistical arrangements in place could yield dire consequences for this region.
Mr. Chairman, I would like to reiterate that this is not just a local issue. This
is an issue that reaches far beyond Pennsylvania. I look forward to receiving testimony that will address how we will deal with the reality of these oil refinery closures, and how this will impact our security.

Mr. MEEHAN. In addition, the United Steel Workers have asked

whether they can submit testimony for the record, and without objection, that is so ordered.*
So we are pleased today to have two panels that we will be hearing from. The first panel has witnesses before us today who bring
expertise from their service on behalf of agencies within the United
States Government. The first is Dr. Howard Gruenspecht, who was
named Deputy Administrator for the United States Energy Information Administration in March 2003. Since July 2011, he has also
served as EIAs Acting Administrator with responsibility for collecting, analyzing, and disseminating independent and impartial
energy information to promote sound policymaking, efficient markets, and public understanding of energy and its interaction with
the economy and the environment. Over the past 30 years, Dr.
Gruenspecht has worked extensively on electricity policy issues including restructuring and reliability, regulations affecting motor
fuels and vehicles, energy-related environmental issues, and economy-wide energy modeling. Before joining EIA, Dr. Gruenspecht
was a Resident Scholar at Resources for the Future. From 1993 to
2000, he served as the Director of Economic, Electricity, and Natural Gas Analysis in the Department of Energys Office of Policy.
I would also like to express my personal appreciation on behalf of
our entire delegation. I know that we on a couple of occasions have
asked for the EIA to make available to us expeditious review of
studies that would give us a sound basis to understand his inter* The information was not received at the time of publication.

9
pretation or the agencys interpretation of the impact of refinery
closings, and I am grateful for the timely response with which the
administration worked.
In addition, we have with us today Mr. Brandon Wales, who is
the director of the Homeland Infrastructure Threat and Risk Analysis Center at the Department of Homeland Security. Under Mr.
Wales leadership, the center has grown to become a robust, allhazards analytical resource for public- and private-sector partners
covering the full array of risks and challenges facing the infrastructure community. Mr. Wales also oversees the Departments Advanced Modeling, Simulation, and Analysis program at the National Infrastructure Simulation and Analysis Center. Mr. Wales
was asked to lead the review of the Counterterrorism and Analysis
program at the National Infrastructure Simulation and Analysis
Center. Mr. Wales was asked to lead the review of the Counterterrorism and Cybersecurity Mission Area during the first Quadrennial Homeland Security Review. Prior to joining the Department,
Mr. Wales served as the principal national security advisor to
United States Senator Jon Kyl and was a senior associate at the
Washington-based Foreign Policy and National Security Think
Tank.
So for both panels, we would greatly appreciate it if you would
summarize your submitted testimony and do your best to keep your
opening statements within the 5 minutes that are allotted under
the rules. So I now recognize Dr. Gruenspecht for your testimony.
Dr. Gruenspecht.
STATEMENT OF HOWARD GRUENSPECHT, ACTING ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY

Mr. GRUENSPECHT. Thank you, Mr. Chairman and Members. I

appreciate the opportunity to appear before you today.
The Energy Information Administration, as you pointed out, is a
statistical and analytical agency. We dont promote or take positions on policy issues, and we have independence with respect to
the information and analysis we provide. Therefore, our views
should not be construed as representing those of the Department
or other Federal agencies.
We have been following changes in the East Coast refining market closely, as described in the reports that accompany my testimony. ConocoPhillips Trainer and Sunocos Marcus Hook refineries
were closed during 2011 but were partially offset by the restart of
PBF Energys Delaware City refinery, which is about the same size
of Trainer. HOVENSAs U.S. Virgin Islands export refinery, which
supplied the East Coast, also closed in February 2012. The impacts
of that closure are just beginning, but by itself, it is not expected
to be a major problem.
Sunoco also announced plans to idle Sunoco Philadelphia, its remaining refinery in the Philadelphia area, in July 2012 if no buyer
is found. As shown in table 1 of my testimony, again, this refinery
alone represents roughly one-quarter of East Coast refining capacity as of August 2011.
As indicated in our latest report, all of these closures would create a shortfall of about 240,000 barrels per day for gasoline and

10
180,000 barrels per day of ultra-low-sulfur diesel, ULSD for short,
by 2013 when both existing demand and expected demand growth
are considered.
A new requirement in New York State that heating oil meet the
ULSD specification starting in July 2012 will effectively boost
Northeast ULSD demand by an estimated 70,000 barrels per day,
or 20 percent on an annual basis, with the impact concentrated in
the winter.
In recent years, Northeast refineries supplied about 40 percent
of the gasoline, 60 percent of the ULSD, and 45 percent of the
heating oil consumed in the Northeast. Product imports and receipts from refineries on the Gulf Coast made up most of the remainder, and would need to be increased to compensate for reductions in refining capacity. Extra barrels may also be brought in
from the Midwest but the main problem is less defined replacement
supplies and the logistics of moving them to locations in the Northeast market.
Two distinct bottlenecks bear watching. The first regards product
movements from the Gulf Coast to the Northeast, whether by pipeline or water. The Colonial pipeline that delivers products from the
Gulf Coast to the Northeast is at or near capacity. Under the Jones
Act, waterborne shipments between U.S. ports must use U.S.flagged vessels built in the United States and manned by U.S.
crews, and the availability of such vessels for new routes is unknown.
The second constraint regards moving products from East Coast
ports onto the smaller product pipelines that originate in the Philadelphia area to serve inland Pennsylvania and western New York.
From a supply standpoint, ULSD will likely be the most challenging fuel to replace, reflecting the global tightness in distillate
markets. Conventional and reformulated gasoline is more broadly
available than ULSD but replacement volumes may still come at
higher prices. If Sunoco Philadelphia refinery closes, prices would
likely rise, but specific price impacts are uncertain. If parts of the
region cannot be adequately supplied in the short term, prices can
spike. In the longer run, we would also expect higher prices and
maybe higher price volatility to result from longer supply chains,
as alluded to in your opening statement. Industry participants
have yet to identify a single solution that would address all of the
logistical hurdles in the short term. Third parties are definitely
looking into options.
Since our report was written, Sunoco has indicated that should
its Philadelphia refinery be idled, its Eagle Point, New Jersey, terminal, which has been converted from a refinery, would be fully
functioning at that time. The terminal would be able to bring in
product from the Delaware River and deliver significant volumes
into the pipelines moving inland into Pennsylvania and western
New York. Sunoco has also informed us of its ability to move limited product volumes across the Marcus Hook and Philadelphia
dockets into these inland systems.
In addition, the American Waterways Operators has indicated
that Jones Act tankers and barges should be able to pick up extra
volumes that may be needed from the Gulf Coast. We hope to learn
more about this in the coming weeks.

11
Over the longer term, significant adjustments in East Coast and
Caribbean transportation, storage, and terminal infrastructure will
help cope with reduced refining capacity and accommodate longer
supply lines. But these facilities will not all become immediately
operational. Also, to the extent these facilities are located outside
the United States and do not have the same reporting requirements as U.S. facilities, the markets will be less transparent.
The situation is evolving. Our reports have already generated
further discussion and information, and we plan to continue to
monitor the situation.
This concludes my testimony, Mr. Chairman and Members, and
I would be happy to answer any questions you may have.
[The statement of Mr. Gruenspecht follows:]
PREPARED STATEMENT

OF

HOWARD GRUENSPECHT

MARCH 19, 2012

Mr. Chairman and Members of the committee, I appreciate the opportunity to appear before you today. The Energy Information Administration (EIA) is the statistical and analytical agency within the Department of Energy. EIA does not promote
or take positions on policy issues, and has independence with respect to the information and analysis we provide. Our views should not be construed as representing
those of the Department or other Federal agencies.
EIA has been following the changes in the East Coast market closely as described
in the reports that accompany my testimony. Significant capacity serving Northeast
petroleum product markets was recently idled. ConocoPhillips Trainer and Sunocos
Marcus Hook refineries were closed during 2011, but were partially offset by the restart of PBF Energys Delaware City refinery, which is about same size as Trainer.
(Table 1) HOVENSAs U.S. Virgin Islands export refinery, which supplied the East
Coast, also closed in February 2012. The impacts of that closure are just beginning,
but by itself it is not expected to be a major problem for Northeast product markets.
Sunoco also announced plans to idle its remaining refinery in Philadelphia (Sunoco Philadelphia) in July 2012 if no buyer is found. This refinery represents roughly
one-quarter of East Coast refining capacity as of August 2011.
As indicated in the report attached to this testimony, all these closures would create a shortfall of about 240,000 bbl/day for gasoline and 180,000 bbl/d for ultra-lowsulfur diesel (ULSD) by 2013, representing the need to both make up for lost production and meet expected demand growth. A new requirement in New York State
that heating oil meet the ULSD specification starting in July 2012 will effectively
boost Northeast ULSD demand by an estimated 70,000 bbl/d, or 20%, on an annual
basis. Because heating demand is seasonal, the impact is concentrated in winter.
In recent years, Northeast refineries supplied about 40% of the gasoline, 60% of
the ULSD, and 45% of the heating oil consumed in the Northeast. Product imports
and receipts from refineries on the Gulf Coast made up most of the remainder, and
would need to be increased to compensate for reductions in refining capacity. Extra
barrels may also be brought in from the Midwest. But the main problem is less to
find replacement supplies than the logistics of moving them to locations in the
Northeast market. Logistics and transportation constraints could raise price levels
and volatility if Sunoco Philadelphia is idled.
Two distinct bottlenecks bear watching. The first regards product movements
from the Gulf Coast to the Northeast, whether by pipeline or water. The Colonial
Pipeline that delivers products from the Gulf Coast to the Northeast is at or near
capacity. Waterborne shipments within the United States require vessels meeting
Jones Act requirements (U.S.-flagged vessels built in the United States and using
U.S. crews). These vessels are in use and availability for new routes is unknown.
The second constraint regards moving products from East Coast ports onto the
smaller product pipelines that originate in the Philadelphia-area to serve inland
Pennsylvania and western New York.
From a supply standpoint, ULSD will likely be the most challenging fuel to replace, reflecting the global tightness in distillate markets. Conventional and reformulated gasoline is more broadly available than ULSD, but replacement volumes
may still come at higher prices.
If Sunoco Philadelphia refinery closes, prices would likely rise, but specific price
impacts are uncertain. If parts of the region cannot be adequately supplied in the

12
short term, prices can spike. In the longer run, higher prices and higher price volatility may result from longer supply chains.
Industry participants have yet to identify a single solution that would address all
of the logistical hurdles in the short term. Third parties are looking into options,
but are unlikely to commit large investments in new logistical arrangements until
the status of Sunoco Philadelphia is known.
Since our report was written, Sunoco has indicated that should its Philadelphia
refinery be idled, its Eagle Point, New Jersey, terminal (which has been converted
from a refinery) would be fully functioning at that time. The terminal would be able
to bring in product from the Delaware River, and deliver significant volumes into
the pipelines moving inland into Pennsylvania and Western New York. Sunoco has
also informed us of its ability to move some product volumes across the Marcus
Hook docks into these inland systems.
In addition, the American Waterways Operators, a trade association for Jones Act
vessels, has indicated that Jones Act tankers and barges should be able to pick up
extra volumes that may be needed from the Gulf Coast. We hope to learn more
about this in the coming weeks.
Over the longer term, significant adjustments in East Coast and Caribbean transportation, storage, and terminal infrastructure will help cope with reduced refining
capacity and accommodate longer supply lines, but these facilities will not all become immediately operational. Also, to the extent these facilities are located outside
the United States and do not have the same reporting requirements as U.S. facilities, the market will be less transparent.
The situation is evolving. Our report has already generated further discussion and
information, and EIA will continue to monitor this situation.
This concludes my testimony, Mr. Chairman and Members of the committee. I
would be happy to answer any questions you may have.

Linden ......................................
Delaware City ..........................
Paulsboro .................................
Warren .....................................
Bradford ...................................
Newell/Congo ...........................
Port Reading ............................
Philadelphia .............................
Marcus Hook ............................
Trainer .....................................
...................................................
Yorktown ..................................
Eagle Pt/Westville ...................

Operating and Idled Refineries:

ConocoPhillips ..............................................
PBF Energy Co. LLC ...................................
PBF Energy Co. LLC ...................................
United Refining Co. .....................................
American Refining .......................................
Ergon-West Virginia ....................................
Hess Corp. .....................................................
Sunoco Inc. ....................................................
Sunoco Inc. ....................................................

ConocoPhillips ..............................................

Total Operating and Idled .......................

Recently Shut Refineries:

Western Refining ..........................................
Sunoco Inc. ....................................................
VA ......
NJ ......

............

PA ......

NJ ......
DE ......
NJ ......
PA ......
PA ......
WV .....
NJ ......
PA ......
PA ......

State

66,300
145,000

1,373,200

185,000

238,000
182,200
160,000
65,000
10,000
20,000
10
335,000
178,000

Operating
Crude Unit
Capacity (bbl/
calendar day)

................
................

100%

13%

17%
13%
12%
5%
1%
1%
0%
24%
13%

Percent of
Region

Shut 9/2010.
Shut 2/2010.

Operating.
Operating.
Operating.
Operating.
Operating.
Operating.
Operating.
Operating, For Sale.
Idled 12/2011, For
Sale.
Idled 9/2011, For Sale.

Status

Port Reading has a production capacity of 70,000 bbl/calendar day but no crude unit capacity.
Notes: Yellow shading indicates operating refineries for sale and at risk of shutdown. Orange shading indicates idled refineries for sale and at risk of shutdown. Red shading indicates shut refineries. Total refinery capacity excludes two refineries that primarily produce asphalt, as well as the Yorktown, VA and
Eagle Point refineries that were shut down in 2010.
Source: U.S. Energy Information Administration.

1 Hess

City

Owner

TABLE 1.U.S. EAST COAST REFINERIES OPERATING CAPACITY

13

14

Mr. MEEHAN. Thank you, Mr. Gruenspecht.

Now I turn to Mr. Wales. Mr. Wales, I look forward to your testimony.
STATEMENT OF BRANDON WALES, DIRECTOR, HOMELAND INFRASTRUCTURE THREAT AND RISK ANALYSIS CENTER, DEPARTMENT OF HOMELAND SECURITY

Mr. WALES. Thank you, Chairman Meehan and distinguished

Members of Congress, for inviting me to address the issue of refinery closures in the Mid-Atlantic Region. The availability of refined
petroleum products is an important issue for the Department of
Homeland Security, and I appreciate the opportunity to discuss
this with you.
I am the Director, as you stated, of the Homeland Infrastructure
Threat and Risk Analysis Center, known as HITRAC, which is
charged with analyzing risks to the Nations critical infrastructure
from threats and hazards both natural and man-made. As you
know, in the last 6 months, two Philadelphia-area refineries have
ceased production, and the third refinery in the region announced
that it will close by July if a buyer is not found. These refineries
represent 50 percent of the regions refining capacity, but a simple
examination of these refineries does not tell the complete story as
there are other sources of refined product for the region including
the Colonial pipeline system, which moves refined product from refineries on the Gulf Coast to cities on the eastern seaboard. Additionally, major East Coast ports receive refined product from various points in Europe and the Gulf Coast.
At HITRAC, we have examined whether the loss of capacity represented by the closing of the Mid-Atlantic refineries significantly
affects the resilience of regional or National petroleum supply system. In other words: Is there sufficient capacity to supply the East

15
Coast with refined petroleum products? HITRACs initial analysis
shows that the refinery closures should not have homeland security
impacts due to this loss of supply.
In order to put our analysis into context, it is important to understand HITRACs role in supporting the Homeland Security mission. HITRAC serves as the analytic arm of the Departments Office of Infrastructure Protection and provides strategic, operational,
and tactical analysis to our public- and private-sector partners so
that they can make more-informed decisions regarding the management of risk. Our work supports homeland security-related exercises, training activities, contingency and security planning, and response to real-world incidents that affect the Nations infrastructure. Modeling complex real-world systems such as the petroleum
network underpins all of the analysis performed by HITRAC.
A massive and complex network of refineries, transmission pipelines, tank farms, and terminals produce and deliver refined petroleum products. Because the network is so interconnected, interruption of any of these components could cascade into other parts of
the system causing imbalances and shortages. However, the system
is dynamic. In the event of a disruption in one part of a pipeline
network, for example, flow can sometimes be diverted to functioning pipelines or production can be surged at another refinery
while consumers respond to shortages and resulting price increases
by limiting consumption.
Because of the significant role that petroleum plays in our economy, HITRAC has undertaken a number of capability development
efforts to better understand the domestic and international fuel
supply. In 2011, for example, we completed a model of the National
transportation fuel system, which helps analysts estimate the effects from damage or disruption to components of this system.
In examining the potential implications of the closure of the
Marcus Hook and Trainer refineries, and the planned closure of
Sunocos Philadelphia refinery, HITRAC executed a simplified analysis of these closures. Initial analysis suggests the closure of these
three refineries will have a negligible impact on the overall availability of refined petroleum product in the supply chain. Additional
refined product moving through the Colonial and Plantation pipelines from spare capacity at refineries in Texas, Louisiana, and
other locations in the Gulf Coast is in sufficient supply to meet demand.
HITRAC also tested our analysis against a major hurricane disrupting Gulf Coast petroleum infrastructure. Analysis there suggests that in this case, there would be supply shortages irrespective
of whether the three Mid-Atlantic refineries operate, though those
shortages would appear no farther north than Washington, DC.
These types of effects were witnessed in the aftermath of Hurricanes Katrina and Rita, where elevated gas prices were seen in cities like Atlanta. The Northeast does have sufficient refined petroleum product in terminals, tankers, and the supplies from Europe
to mitigate the hurricanes impact.
I would like to make an important caveat. Our analysis focuses
on refined product as a whole rather than on individual products.
As such, local supply and storage of individual fuels and distillates
along the supply chain might lead to localized shortages not cap-

16
tured in the aggregate. The model does not give any insight, for example, into the specific availability of low-sulfur heating oil, ultralow-sulfur diesel, or gasoline with additives for particular cities.
These specialized products could be in short supply under some
conditions.
Our vision is a safe, secure, and resilient critical infrastructure
based on and sustained through public-private partnerships to
mitigate risks to, strengthen the protection of, and enhance the allhazard resilience of the Nations critical infrastructure.
Thank you for holding this important hearing, and I would be
happy to respond to any questions.
[The statement of Mr. Wales follows:]
PREPARED STATEMENT

OF

BRANDON WALES

MARCH 19, 2012

Thank you Chairman Meehan, Ranking Member Higgins, and distinguished Members of the Subcommittee on Counterterrorism and Intelligence for inviting me to
address the issue of refinery closings in the Mid-Atlantic Region. The availability
of refined petroleum products is an important issue for the Department of Homeland Security (DHS), and I appreciate the opportunity to discuss this with you.
I am the director of the Homeland Infrastructure Threat and Risk Analysis Center (HITRAC), which is charged with analyzing potential threats to, and consequences and vulnerabilities of, the Nations critical infrastructure. Our work examines both natural disasters and terrorist threats that can disrupt critical infrastructure systems, including the petroleum fuel network, in order to improve security and enhance the resilience of these infrastructure systems.
Today, I am here to discuss DHS views on how the planned closure of the Marcus
Hook refinery might affect broader critical infrastructure resilience. In the last year,
two Philadelphia-area refineries have been idled, which means they have ceased
production. The first, owned by ConocoPhillips, located in Trainer, Pennsylvania,
with an operating capacity of 185,000 barrels per day, was idled in September 2011
and currently remains for sale. The second, owned by Sunoco Inc., located in Marcus
Hook, Pennsylvania, with a capacity of 178,000 barrels per day, was idled in December 2011. Recently, Sunoco announced plans to close a third refinery in the region,
a 335,000 barrels-per-day refinery in Philadelphia, Pennsylvania, if no buyer is
found by July 2012. These three refineries represent 50 percent of the regions refining capacity. Coupled with the closing of other refineries in the region (Western Refining in Yorktown, Virginia, at a capacity of 66,300 barrels per day, shut down in
September 2010; Sunoco Inc., Westville, New Jersey, at a capacity of 145,000 barrels per day, shut down in February 2010) and refineries that supply the region
(HOVENSA LLC, St Croix, U.S. Virgin Islands, at a capacity of 335,000 barrels per
day, shut down in February 2012) a significant portion of the regions ability to
produce refined product will be shuttered.
A simple examination of refineries does not tell the complete story, however, as
there are other sources of refined product for the region. These include the Colonial
and Plantation pipeline systems, which move refined product from refineries on the
U.S. Gulf Coast to cities on the eastern seaboard. In addition, the major East Coast
ports receive refined product via tanker from various points in Europe and via barge
from U.S. Gulf Coast refineries using the Intracoastal Waterway.1
At HITRAC, we have examined whether the loss of capacity represented by the
closing of the Mid-Atlantic refineries significantly affects the resilience of the regional or national petroleum supply system. In other words, is there sufficient capacity to supply the East Coast with refined petroleum products? HITRACs initial
analysis, which included analyzing a major disruption of refineries in Louisiana coupled with the closure of the Bayway Refinery in Linden, NJ, for an unspecified reason, shows that the closing of Sunocos Marcus Hook refinery, combined with the
closing of Sunocos Philadelphia and ConocoPhillips Trainer refineries should not result in shortages of refined products as a whole, in the Northeast or elsewhere.
1 For additional analysis, see U.S. Energy Information Administration, Potential Impacts of
Reductions in Refinery Activity on Northeast Petroleum Product Markets, February 2012, at
http://www.eia.gov/analysis/petroleum/nerefining/update/pdf/neprodmkts.pdf,
accessed
March 7, 2012.

17
Before presenting our analysis and conclusion, I would like to make an important
caveat. The model focuses on refined products as a whole rather than on individual
products. For example, the model does not give any insight into the specific availability of low sulfur heating oil, ultra-low sulfur diesel, or gasoline with additives
for particular cities. The focus of this analysis is the availability in the Northeast
of refined products in the aggregate to meet overall energy needs. The availability
of these energy sources constitute the potential National security issue that may
arise due to the idling of the three Philadelphia area refineries. The fact that the
model does not indicate the availability of all grades of fuel limits its utility for a
more detailed analysis of potential economic impacts, but not for identifying National security concerns.
The Energy Information Administration has analyzed energy market implications
of the situation in detail in its February 2012 report Potential Impact of Reduction
in Refinery Activity on Northeast Petroleum Product Markets. In contrast to the
HITRAC analysis, that report did explore the potential impacts of the Philadelphia
refinery closures on individual products such as ultra-low sulfur diesel, and discussed a range of specific logistical challenges associated with moving replacement
products into certain areas of Pennsylvania and New York.
ORGANIZATION OVERVIEW

In order to put our analysis in context, it is important to understand HITRACs

role in risk mitigation, consequence analysis, and the building of resilience in critical infrastructure. Within the DHS National Protection and Programs Directorate
(NPPD), the Office of Infrastructure Protection (IP) is responsible for leading and
coordinating the National effort to strengthen the protection and enhance the resilience of critical infrastructure.
HITRAC serves as the analytic arm of IP and provides timely strategic, operational, and tactical analysis to our public- and private-sector partners so that they
can make more informed decisions regarding the management of risk. HITRACs
analytic products provide actionable information to stakeholders and decision makers at DHS; partner agencies in Federal Government; State, local, Tribal, and territorial governments; and the private sector. Our work supports homeland securityrelated exercises, training activities, security and contingency planning, and response to real-world incidents that affect the Nations critical infrastructure.
HITRAC also manages the National Infrastructure Simulation and Analysis Center (NISAC), which was created by Congress to be the source of national competence to address critical infrastructure protection and continuity.2 NISAC is a
partnership between Los Alamos National Laboratory and Sandia National Laboratories that brings together the laboratories expertise in modeling, simulation, and
analysis to problems of system vulnerability and consequence analysis.
Through the work of analysts and modelers at NISAC, HITRAC is able to provide
decision makers with high caliber analysis of infrastructure failures and disruptions
and accurate representations of how those disruptions propagate from one infrastructure to another.
HITRAC ANALYSIS

In the past 2 years, HITRAC has provided support to decision makers during a
wide variety of real-world incidents, including flooding in the Midwest, Hurricane
Irene, the Japanese earthquake and ensuing risks of tsunami and radiation fallout,
wildfires in the Southwest, earthquakes in Peru and Haiti, and industrial accidents
including the BP Oil Spill. HITRAC analytic products associated with these supported Executive Branch decision makers as well as decision makers at the State
and local level and in the private sector. Decision makers expect HITRAC to provide
information on:
Critical infrastructure in the impacted region, prioritized by importance;
Expected length of time before electric power is restored to 90% of the outage
area;
Expected economic impact of the incident;
Cascading impacts to regions outside the direct impact area; and
The importance of any supply-chain disruptions.
HITRAC analysts consider the direct and indirect impacts of a disruptionreal
or hypotheticalon population, critical infrastructure, and the economy. Additional
analysis can include cascading impacts over time to a region and to the Nation as
a whole. In the case of the oil, lubricant, and petroleum network, an example of direct impacts might be hurricane damage, which would force a temporary refinery
2 Section

1016(d)(1) of the USA PATRIOT Act; Public Law 10756; October 26, 2001.

18
or pipeline closure, such as when Hurricane Irene closed the Bayway Refinery in
New Jersey for a few days in August 2011. Resulting temporary shortages of oil or
petroleum products in other regions would be considered indirect impacts. Shortages, in turn, would drive up prices so that supply could meet demand and could
affect companies or operations heavily dependent on these products. A further impact might be seen in the regional or National economy. I should note that we do
not always see indirect impacts, and did not in the case of the Bayway closure.
The crude oil and petroleum product network forms a complex and integrated supply chain, which is global in its scope. Supply-chain analysis examines the ways individual firms make operational decisions in response to disruptions, including how
they purchase goods, produce products, sell them in markets, and ship them via different modes of transportation. Disruptions within these chains can affect the ability of some infrastructure entities to provide their products or service to the population. Foreign facilities and foreign sources of materials are of particular concern
because they are farther away, are outside of U.S. Federal assistance, and may be
more prone to disruption than domestic sources and facilities.
PRIOR PETROLEUM INDUSTRY ANALYSIS

A massive and complex network of refineries, transmission pipelines, tank farms,

and terminals produces and delivers refined petroleum products in the United
States. Because the network is so interconnected, interruption of any of these components can quickly cascade into other parts of the system, causing imbalances and
shortages. However, the system is also dynamic: Companies and consumers make
decisions as conditions change. For example, in the event of a disruption in one part
of the pipeline network, flow can sometimes be diverted to functioning pipelines or
production can be surged at another refinery, and imports can increase, while consumers can respond to shortages and resulting price increases by limiting consumption.
Because of the significant role that petroleum plays in our economy, we have undertaken a number of capability development efforts to better understand the domestic and international oil markets. As an example, in 2011 we completed a model
of the National transportation fuel system. This dynamic model includes estimates
of how corporations and individuals would respond to a disruption in some part of
the petroleum system. This model is designed to help analysts estimate the availability of transportation fuel in the event that a component (e.g., refineries, pipelines, or storage tanks) of the National fuel supply chain is damaged or disrupted.
In the event of an unforeseen disruption, analysts can use this model to determine:
Which regions of the United States will experience shortages of transportation
fuel, given the specific disruption to one or more components of the fuel infrastructure.
What the duration and magnitude of the shortages will be.
MID-ATLANTIC REFINERY CLOSURE ANALYSIS

In examining potential implications of the closure of the Marcus Hook Refinery,

in addition to the closure of the Trainer refinery and the planned closure of the
Philadelphia refinery, HITRAC executed a simplified analysis of the potential closures. The analysis included a determination as to the availability of transportation
fuels throughout the Mid-Atlantic and Northeast States. The analysis included:
A baseline assuming that no refineries close;
Analysis assuming that all of the specified refineries close with shortfalls made
up through the Colonial Pipeline and imports from other parts of the United
States and Europe; and
Analysis assuming that a major hurricane, similar to Hurricane Katrina (2005)
or Hurricane Gustav (2008), strikes Louisiana and disrupts impacted Gulf Coast
refineries, associated storage terminals, and Colonial Pipeline shipments to the
Mid-Atlantic and Northeast States.
The model assumed that no additional refined product supplies above normal deliveries would be available from Europe, and that all shortfalls would have to be
filled domestically.
The initial analysis we conducted suggests the closure of the three refineries in
the Mid-Atlantic region will have a negligible impact on the availability of refined
petroleum products as a whole along the East Coast. Again, our analysis does not
focus on individual products. We estimate that refined product from various sources
with spare capacity will be sufficient to meet demand. This is comprised of some
combination of spare capacity in Northeast and Mid-Atlantic refineries or additional
refined product moving via various transportation modes from refineries in Texas,
Louisiana, and other locations on the U.S. Gulf Coast.

19
The hurricane analysis suggests that there would be supply shortages, irrespective of whether the three Mid-Atlantic refineries operate. Montgomery, Alabama;
Knoxville, Tennessee; Nashville, Tennessee; Columbus, Georgia; Bainbridge, Georgia; Augusta, Georgia; Roanoke, Virginia; and Raleigh, North Carolina would experience some unmet demand during this period. Washington, DC, would not able to
meet its demand in the disruption scenarios, falling approximately 35 percent short
for a period of 6 days. The analysis shows that the Northeast does have sufficient
inventories of refined petroleum product, transportation capacity from unaffected
domestic sources, and normal supplies from Europe and thus would not be impacted
by a hurricane in this case.
It should be noted that HITRACs initial analysis should not be misconstrued as
a full study of all of the implications of these refinery closures, but it does give us
a preliminary estimate of how these closures impact the Nations fuel supplies.
Should more detailed work be required, we will consult with our partners to ensure
that our analysis is based upon the full expertise contained throughout the Government. Our analysis also does not cover particular blends of transportation fuels refined for certain markets or ultra-low sulfur distillates. There may be shortages of
these types of products.
CONCLUSION

Our vision is a safe, secure, and resilient critical infrastructure based on and sustained through strong public and private partnerships to mitigate risks to, strengthen the protection of, and enhance the all-hazard resilience of the Nations critical
infrastructure. Thank you for holding this important hearing. I would be happy to
respond to any questions you may have.

Mr. MEEHAN. Thank you, Mr. Wales. I thank both of the witnesses for their testimony, and I will recognize myself for 5 minutes of questioning.
Mr. Wales, you have suggested that there is sufficient capacity
within the United States to be able to supply in the event of demands here in the Northeast the sufficient fuel for this region, appreciating that 50 percent of the refining capacity is now going to
exit this region if all of these refineries close down. Is that capacity
in your estimation currently solely within the United States? In
other words, we have the refining capacity here within the United
States?
Mr. WALES. Our assumption is that some of that capacity would
be outside the United States, particularly in refineries in Europe
where the Northeast may be purchasing additional supply.
Mr. MEEHAN. So in effect, what we are talking about is not just
refineries in Louisiana or otherwise, we would be required now to
move over and get refined product from foreign countries that
would fill the current gap?
Mr. WALES. That is correct. We would assume that some of the
capacity would be based on Gulf Coast refineries increasing their
production, using some of their spare capacity and additional supplies we purchased from Europe.
Mr. MEEHAN. That dramatically expands the supply chain for us
then as well because one of the things we have been talking about
is the logistics of this situation in terms of its impact here on this
region. It is one thing to get crude product that comes up to the
region but we are now looking at refined product as well. Does this
push the issuewhat percentage of it in your estimation is going
to be pushed further offshore?
Mr. WALES. We dont have an estimate for the exact percentage.
I am not sure if my colleague from EIA may have a better sense
of what that import may look like.

20
Mr. MEEHAN. Dr. Gruenspecht, do you have any opinion with respect to the implications our pushing more of the actual product
needs to other parts of the country?
Mr. GRUENSPECHT. Yes. Thank you, Mr. Chairman. The United
States has traditionally and the Northeast has traditionally imported product as well as crude, particularly a lot of product going
into New York Harbor and some other ports as well, up and down
the East Coast. What is potentially I think of interest or of concern
relates to the specific parts of the Northeast that are supplied from
the Philadelphia-area refineries and those are connected through a
series of smaller product pipelines that originate in this area, and,
you know, being able to serve a larger region easily may not consider in some sense some of the specific logistical issues associated
with the way certain partsinland Pennsylvania, western New
Yorkhave been supplied historically.
Mr. MEEHAN. I would like to follow up on those points with regard to logistics, because you mentioned in your testimony the idea
that logistical challenges still have not been worked out, and one
of the ways in which, as I understand it, the capacity will be realized will be to use the pipelines, particularly the Colonial pipeline,
and as I have been reading on this, the Colonial pipeline is expecting at some point in time to increase the current flow some 30 barrels per day, about a third of it in the next 3 months, and then
about 120,000 additional barrels per day that will flow, but at a
certain point arent we going to see a capacity in which that pipeline is maximized?
Mr. GRUENSPECHT. Yes, I would have to get back with you on the
specifics. I would want to be sure to get them right. But our view
of the situation has been that the Colonial is pretty tight right now
because some of the same forces thatyou know, some of the refineries that are at the origin point of the Colonial might be more economically competitive than some of the ones
Mr. MEEHAN. In other words, what is going to happen is, we are
looking right now at an expectation that oil can flow here but there
could be demands in other parts of the country. Could there be demands in other parts of the world that would lead refined oil to be
moved to another location rather than here to the Northeast?
Mr. GRUENSPECHT. Well, I think it will move here if the price is
right. I dont know right for who, right for the suppliers or right
for the consumers, which tend to have different perspectives on
this, but, you know, our view is that supplies can flow into this region. I think limited capability right now on the long-distance product pipeline, particularly, the Colonial that serves this region, some
opportunity for products to flow into marine terminals including
the new marine terminal and a refinery that was closed earlier because this thing did not begin just this year. Eagle Point in New
Jersey, also a Sunoco refinery, I believe that is beingwell, I know
that is being converted into a pretty big terminal. Again, Sunoco
since our report has come out, they have been a little more open,
I think, about, you know, whether that terminal will be fully operational. So there is the opportunity to bring in shipborne product
into Eagle Point but again, the issue of the Jones Act tankers and
other such issues arise and what the cost of those shipments would

21
be. So it is a prettyI know it is a lot of detail but it is a pretty
complex situation.
Mr. MEEHAN. I see my time is expired, but I would like to ask
to follow-up in addition to the idea of there being a point in which
we will maximize the capacity in the principal pipelines, you also
mentioned that there are distribution issues sort of at the point of
access here locally which the oil-refined capacity has to go down,
and so would you explain that and tell me what the implications
of that are?
Mr. GRUENSPECHT. Yes. There are parts of particularly Pennsylvania and New York State that are served by smaller product pipelines again that originate in this area and are tied into all of the
refineries in this area and are also tied in, I think, to the Colonial
pipeline, and pipelines are a very efficient way to move petroleum
products, and the concern would be that if you can get the product
but you cant get it into those pipelines which were originally designed to be fed by the output of the refineries in this region, then
you might have a situation where more expensive means of moving
product might be required and that would be reflected in the prices
of product.
Mr. MEEHAN. If I can indulge in one last question, but we are
also talking about pipelines, but I am seeing more discussion about
reversing pipelines as we are looking at different energy resources
and other kinds of things. Is it possible that any of the pipelines
that we are currently anticipating to be available for the flow of the
gasoline to our region or other kinds of refined products would be
rerouted either in terms of their direction or would be utilized as
a right-of-way, the access to that pipe would have more value for
another commodity and therefore be dedicated to that?
Mr. GRUENSPECHT. As you obviously follow these matters very
closely, as your question suggests, there has been talk, and there
is often talk about changing the direction of pipelines. For instance,
some of the pipelines that went from the Gulf Coast to feed crude
oil up into the mid-continent, there is this talk about reversing
those because there is significant amounts of petroleum production
in the mid-continent and those are being reversed. What you may
be referring to is the growth in natural gas and natural gas liquids
production in Pennsylvania, and there is at least one project that
I believe had talked about using an existing pipeline to move natural gas liquids from producing areas in the Marcellus throughout
Pennsylvania toward the Port of Philadelphia. So that would again
be a re-utilization of a pipeline. I dont know that that will come
to fruition. I suspect that probably will not be immediately coming
to fruition.
Mr. MEEHAN. My time is expired, and I will recognize the gentleman from Delaware, Mr. Carney.
Mr. CARNEY. Thank you, Mr. Chairman.
Dr. Gruenspecht, I would like to explore with you a little bit the
economics of these petroleum markets and what in particular in
those economies have affected the ability of these particular refineries to be profitable. I think you know a little bit about that, and
I would like to explore what those factors are. I must say that in
the several months that we have been working on this issue, I have
been struggling to understand how prices of these refined products

22
dont seem to track the price of gasoline at the pump and of the
end-users like maybe they do in other markets. Could you explain
for me the dynamics of these pricing mechanisms and what has
been at play here in the last year or so that have caused the problem for the profitability of these facilities? I know that is probably
more than one or two issues. There are a number of issues that are
in play.
There is something in our material here that shows the price of
end product of gasoline at the pump that has fluctuated from a low
of just under $2 in March 2009 to a high during the summer of
2008 of $4.11 to the National average today at $3.82 and up and
down and around over that whole course of time. Obviously the
cost associated with refining and with the extraction of petroleum
from the ground doesnt fluctuate like that. I wouldnt think so.
What is driving this and what has squeezed the refining piece of
it? You are making faces at me.
Mr. GRUENSPECHT. I am making faces because there is no video,
hopefully, but that is a pretty tough question. I am not sure. I will
try but it will be hard because you could talk for hours on this and
still not get to the bottom of it.
I think the factor that is most affecting the price of gasoline and
other refined products is in fact the price of crude oil. The price of
crude oil has been moving a lot, you know, in recent history. I
think we hit a peak of like $147 a barrel in July 2008. I think it
was down to about $30 a barrel by the end of that year$35 a barrel by the end of 2008, beginning of 2009, in part as the world
economy ran into some very tough situations and global demand
for oil crashed. Prices have been on a roller coaster ever since, certainly began to take off at the beginning of 2011, a significant upward moving associated with some of the events surrounding the
Arab Spring and certainly the Libya disruption.
Mr. CARNEY. So events that really arent a function of cost of extraction?
Mr. GRUENSPECHT. I dont think it is a function of the cost of extraction. Costs of extraction are not changing as radically as the
price
Mr. CARNEY. Fairly consistent, wouldnt you say?
Mr. GRUENSPECHT. It varies. Cost of extraction varies across the
projects. There are some places where it is relatively cheap to extract oil. Some of the more marginal places are more expensive.
But I think it would be hard to sit here with a straight face and
argue that the cost of extraction has been ping-ponging around.
Mr. CARNEY. It might move consistently up at some level but not
up and down.
Mr. GRUENSPECHT. No, it is not moving like that. I mean, clearly
what is going on is more the view of the supply-demand balance
in the world which certainly the demand side is very driven by economic conditions in the world. As you know, I think the growth in
oil demand in the world is really in the developing countries, not
in places like the United States. In fact, our demand is perhaps
falling off slowly.
Mr. CARNEY. I see my yellow light is on so let me just move to
another question. So the profitability of refining really is a function

23
of the spread between the price of crude and the price at the pump
or the price of the end-user. Is that correct?
Mr. GRUENSPECHT. In part, but I would say one of the things
that has been very interesting is that different crude streams have
moved in different directionswell, they dont move in different directions but the prices of different crude sources have separated a
bit and I think that has been particularly difficult for the refineries
in this area because they had tended to use light sweet crude oil
imported from Africa and they have been at a relative competitive
pressure because the refineries that they are competing with are
using crude
Mr. CARNEY. Like Delaware City.
Mr. GRUENSPECHT. Delaware City somewhat but particularly
some of the refineries in Texas using heavier crude, some of the refineries in the Midwest using I guess crude that is sort of stuck in
the Midwest and is sold at a discount. So I think that is
Mr. CARNEY. It is a cheaper crude.
Mr. GRUENSPECHT. Cheaper crude selling the same product. That
is very tough. If you are running a store and, you know, your inputs cost more than the inputs of your competitors, that could be
very tough.
Mr. CARNEY. So the end-userone last question if the Chairman
will allow. So the end-user price, you know, one could see where
the price at the pump or the price for heating oil, whatever it
might be, would just track crude oil prices but that doesnt seem
to be the case, so what is the differential there?
Mr. GRUENSPECHT. Again, it depends. I mean, if you were in the
Rockies now, your gasoline price is lower than in other parts of the
country, in part because their crude is cheap. But if you are receiving products from refiners in a variety of different places, as the
East Coast does, then it is going to be the most expensive refiner
that serves the area that is going to set the price in that region,
and the refiners who have access to lower-cost crude are going to
make higher profits.
Mr. CARNEY. One of the concerns I have had all along is the fact
that some of these factors may be temporary conditions and yet we
are looking at a permanent shutdown, if you will, that would have
long-term effects when those price differentials are going to fluctuate over time and it causes me considerable heartburn. I thank
you, Mr. Chairman.
Mr. MEEHAN. Thank you, Mr. Carney. The Chairman now recognizes the gentleman from Bucks County, Mr. Fitzpatrick.
Mr. FITZPATRICK. Thank you, Mr. Chairman.
Dr. Gruenspecht, how great a price impact would you foresee
your predicted ultra-low-sulfur diesel shortfall have on, say, the
price of home heating oil or diesel for trucks or other vehicles?
Mr. GRUENSPECHT. Again, I think it really does remain to be
seen. If in fact, if you look at the differentials between ultra-lowsulfur diesel in various markets, the East Coast has traditionally
been cheaper than some of the markets we would need to attract
supply from should Sunoco Philadelphia close, so there might be a
few cents there. Again, there are some questions associated with
the logistics of transportation, which may be the larger issue in
getting it to the specific locations, particularly the inland locations.

24
So we did not hazard a guess as to what might happen. I mean,
there can be localized shortages, and when you get localized shortages, you get localized price spikes, but we are not smart enough
to project, you know, when those might occur, if they will occur,
and where they might be. Perhaps my colleague at Homeland Security could take that one on. I dont think he wants to.
Mr. FITZPATRICK. Do you care to comment, Mr. Wales?
Mr. WALES. We generally dont look from our perspective at individual products in markets and the effect on prices. You know, it
is really an issue for an independent group like EIA to kind of
evaluate the market conditions. Our primary concern as I described
during my testimony is can a region have enough product, and in
particular, can they have enough product even if it is not necessarily the product that they want or that they need. So in some
cases, we have seen in the past during natural hazards like hurricanes where EPA waives certain rules related to fuel mixtures and
additives in order to mitigate potential shortages of specific distillates or specific fuel mixtures.
Mr. FITZPATRICK. Doctor, in your testimony when you talked
about moving supply from other areas, in particular, say, the Gulf
up to this region, you indicated that the pipelines were at or near
capacity, and in connection with potential shipping, that there were
some issues including the Jones Act, which you have mentioned a
couple of times. Can you expand on that a little bit about what you
think the potential is for price impact to try to get the product back
up here?
Mr. GRUENSPECHT. Well, it is probably hard to go beyondyou
know, there are potential issues related both to some extent to getting the product here, being the Port of Philadelphia, and then the
issue of getting it inland. You know, we have had some, I guess
with respect to that, although it is not particularly good news essentially from the point of view of people who worked, you know,
in the refineries here but there has beenwe have been concerned
that it would be difficult to move things into some of the smaller
pipelines that Sunoco Logistics operates that move stuff west toward Pittsburgh and up into central Pennsylvania and western
New York. It seems that with the Eagle Point terminal, you know,
we are learning more from Sunoco Logistics and it seems that
there is a pretty good capability there via those pipelines, so that
is good news. There is some limited capability to move product
across the docks at Marcus Hook and Philadelphia that we have
become aware of. Again, those were clearly set up to receive crude
oil to refine so, you know, but there is a limited capability to move
product across those docks. Then, you know, the question of the
shipping. We are still looking into how much capacity there is really available, you know, a question of bringing supplies in from Europe, perhaps. One could almost imagine a trade where Gulf sends
distillate products to foreign markets and then foreign markets
supply distillate products to the United States. You know, there is
a lot of extra movement involved in that so there is probably some
price impact involved, but it is really hard to tell. I would not want
to give you an impression that I knew the answer when I dont.
Mr. FITZPATRICK. I appreciate your time. Thank you.
Mr. MEEHAN. Thank you, Mr. Fitzpatrick.

25
I just have a couple of follow-up questions for the panelists, and
I will certainly invite my colleagues if they have a follow-up question or two to ask it as well. Dr. Gruenspecht and Mr. Wales, both
of you had testified that the price of crude oil was really the thing
that affected cost the most, the actual cost here, but we have recently begun to see the development of new oil resources in North
Dakota, among other places, and certainly access to Canadian oil.
You testified, Mr. Wales, that we have sufficient capacity right
now, refining capacity. In fact, my recollection from your written
testimony is we have excess capacity here in the country, even if
we were to lose these refineries in the East. But would that change
if in fact we fully developed and exploited the opportunities that
exist in North Dakota and some of the other places right here in
the continental United States? Do we have enough refining capacity to be able to handle the opportunity that has been realized by
these new oil finds?
Mr. WALES. We have not explored the issue of the capacity of the
markets to respond to future growth in crude oil exploration and
production. My colleague may have looked into that issue more
than we have.
Mr. MEEHAN. Dr. Gruenspecht, have you looked at that issue?
Mr. GRUENSPECHT. We have looked at it, I would say broadly.
You know, one of the questions or issues is the level of demand in
the United States for petroleum for what we call liquid fuels because increasingly what we use as gasoline actually almost universally across the country now contains 10 percent ethanol and could
contain more ethanol. That reduces the demand for the components
that come out of the refinery. It is also the case that the country
has, you know, increasing fuel economy standards for new vehicles,
which many people, you knowand I wouldnt take a position on
it because I dont have to, but many people, you know, view that
as a very good thing. That also affects the future demand for petroleum products. So the United States really for the first time in the
last 60 years, in 2011 we were actually a net exporter of petroleum
products, which is very unusual. I mean, we were bringingyou
know, 5 or 6 years ago, we were bringing tremendous amounts of
petroleum products into the country. We still do bring tremendous
amounts of petroleum products in but we are sending a lot of petroleum products to South America, to other markets. Again, the refineries that are doing this are primarily the ones that have access
to the advantaged crews like the ones on the Gulf Coast.
Mr. MEEHAN. Well, my recollection is that 90 percent of the oil
that we refine here is imported while some of it in the United
States the overall we get oil from, you know, within. When I say
exported, I mean imported. It could be imported from Canada and
Mexico as well, not necessarily imported from Europe and Asia.
But my concern is, if we push this further off into India and places
like that, we are creating, Mr. Wales, not only just a need now in
which our National security is related to stability over in those nations for crude oil but in addition, we are now needing stability not
just for crude oil but also for refining capacity. So it is not just getting the oil over here but their refineries have to be operating,
which is the frustrating thing to me that we are shutting them
down here and watching expansion in India. Have you calculated

26
the potential impact if we have instability in some of those foreign
markets about what would happen here?
Mr. WALES. Congressman, we have not yet conducted analysis
like that. I think part of that reflects the fact that to date, we
havent seen disruptions to that part of the supply chain and it reflects that the market is not yet fully mature in terms of how it
will all shake out, where we will likely get more of our supplies.
As we get more of that information, we will start rolling that into
our analysis. We can better understand what a more mature oil
and gas supply chain is for the United States and how it would actually affect our homeland and National security.
Mr. MEEHAN. Well, just a follow-up question and the last question with respect to this area, but I doI mean, this committee
deals with the issue of terrorism, and one of the great concerns
that we have is the vulnerability of pipelines and other kinds of
systems, you know, other kinds of assets within the network from
refineries to transmission pipeline to tank farms and terminals to
the most vulnerable presumably among them, pipelines themselves, and we know, I mean, just historically, I just did sort of a
quick off the back of the cuff look just going through January 2006,
we had a jihadist website that linked al-Qaeda that encouraged attacks on the United States pipelines. That was in January 2006.
In June 2007, the jet fuel pipelines at JFK were targeted and attacked. In July and September 2007, we had the Mexican rebels
detonated bombs along the pipelines along the Mexican coast. In
November 2007, we had a United States citizen that was convicted
of trying to conspire to blow up a pipeline from here in the middle
district of Pennsylvania. We had testimony earlier this morning
that bin Laden in Abbottabad had created an identification of pipelines as one of the principal targets. What is the vulnerability that
we have to the sureness of supply here if a pipeline like the pipeline that is servicing us that will be used as the substitute to serve
the capacity here can be impacted? Can it be impacted and will it
have a downstream implication for our region?
Mr. WALES. Congressman, you are raising an excellent issue. I
would like to talk about that for a couple of minutes because it is
something that the Office of Infrastructure Protection had spent a
lot of time on over the past several years, in one case, because of
the potential threat posed by international terrorist groups to the
oil and gas infrastructure of the country and because of the criticality of pipelines to the overall economy.
Over the past several years, the Office of Infrastructure Protection has conducted over 60 vulnerability assessments on pipeline
infrastructure throughout the country. In some cases, in conjunction with that, we have conducted over 80 buffer-zone protection
plans. That is, working with State and locals and the private sector
on integrated planning related to the security and resilience of
those pipelines, and as part of those buffer-zone plans have given
out over $10 million in grant funds to local communities to execute
the planning and improve security around pipelines.
In addition, during the fiscal years of 2012 and 2013, the Office
of Infrastructure Protection will be executing a regional resiliency
assessment of the Colonial and Plantation pipelines because they
are a real critical artery in our overall energy infrastructure on the

27
East Coast and in some cases because of the closing of these refineries they are becoming even more critical. We would say that part
of that regional resiliency assessment will have us conducting detailed assessments of various critical chokepoints along those pipelines both hydraulically critical pumping stations as well as control
centers and others. We will be conducting analysis to better understand how disruptions of the Colonial pipeline and Plantation pipeline could affect the broader critical infrastructure questions. We
will be working with customers of the Colonial pipeline as well as
with some of the infrastructure that the Colonial pipeline depends
upon, for example, electric infrastructure that may be critical to operating the pumping stations and terminals along its stretch. So
this is an issue that we are taking very seriously and it is an issue
that we are going to continue to work on, and we would be happy
to come back and brief you and your staff on our plan for the Colonial and Plantation pipelines and our results as they materialize.
I will say that our initial work over the past couple years looking
at things like the Colonial pipeline shows that they are very critical
but they are pretty resilient in terms of bouncing back and being
able to repair damage to pipelines very quickly. Our primary concern would be a prolonged damage to the pipeline that kept it down
for more than a week, more than 2 weeks. I think, you know, once
you start getting beyond a week or 2, the ability for the excess inventory and terminals along its route starts to be diminished and
then you could start to have more serious impacts, but we would
be happy to come provide further information on that.
Mr. MEEHAN. Well, I am grateful for your efforts in that area,
and I would ask if you could, you can appreciate the implications
of that study, that we are sort of currently dealing with the questions of what will happen if we lose this refining capacity. That
pipeline is not going to be quite so significant to us in the event
that we continue to have refining capacity in this region, but if we
lose that refining capacity, it is going to be a critical link. So the
vulnerability ties right into the most energy-dependent sector in
the entire Nation and I imagine the implications for that, particularly during a particular season, a heating season, and, you know,
the Pennsylvania, New York, New England area would have remarkable implications not only to people but to our economy as
well. So anything that could be done to expedite that among the
many priorities you have would be greatly appreciated by this
panel and by our region. So thank you, Mr. Wales.
I will turn to my colleague, Mr. Carney.
Mr. CARNEY. Thank you, Mr. Meehan. I think you have identified
the main homeland security risk with respect to the concentration
of refining capacity here in the United States, and it is hard for
me to imagine that our homeland security is not threatened in
some way by that, by concentrating the facilities that will deliver
refined products or petroleum products to regions in the country as
opposed to having a more distributed network.
In addition, the discussion this morning has centered around the
off-shoring frankly of refining capacity, which would then make the
United States, in my opinion, less independent, less energy-independent and more at risk to overseas attacks on whatever facilities.
I appreciate the fact that you are going to do an analysis of those

28
pipelines in particular because it seems to me that it is a little bit
hard to wrap my head around the fact that Dr. Gruenspecht has
indicated that the Colonial pipeline is near capacity and we are
going to be relying on it to move product here to our region, that
that wont have a negative impact. But setting that aside, will your
study include the risks associated with relying more on refined
product coming from overseas where facilities in other parts of the
world that we cant protect, so to speak, are at risk?
Mr. WALES. Sir, the study that I was discussing in response to
the Chairmans question was really focused on the resilience of
those pipelines, Colonial and Plantation. It wasnt a more expansive study looking at the risks associated with the global
Mr. CARNEY. So it might be important for somebody to take a
look at that question, particularly as it relatesas the Chairman
has said, you know, this is a decision that is coming at us pretty
quickly. Two of the refineries have already closed. So we are talking about long-term implications of our own energy independence
as a Nation as well as the security of that network, and it is hard
for me to imagine that it is not going to be a greater risk. It is a
little disturbing to hear, Dr. Gruenspecht, that a lot of these facilities are basically taking domestic supplies and exporting refined
products in a world where we are importing such a big part of our
petroleum needs, that the market drives certain of these products
overseas. In fact, my understanding is, a lot of those refined products out of the Gulf Coast are for export. Is that accurate?
Mr. GRUENSPECHT. We have been exporting increasing amounts
of product from the Gulf Coast. Obviously the Gulf Coast also is
a major source of supply to other parts of the country. It is the
major refining center in the country. Roughly half of the refining
capacity in the country is on the Gulf Coast.
Mr. CARNEY. So at a time when we are putting in policies that
are having negative implications for our demand for end-products,
i.e., the use of ethanol and other biofuels, to help the Nation be
more energy-independent, because of the way the markets work,
we are still exporting product, which is making us less independent. Is that a fair statement?
Mr. GRUENSPECHT. I think we are exporting products. You know,
I mean
Mr. CARNEY. Whether it makes us more independent is
Mr. GRUENSPECHT. I dont know the
Mr. CARNEY. Well, let me give you a real
Mr. GRUENSPECHT. We import airplanes and we export airplanes.
Mr. CARNEY. Let me give you a real-world example of where this
is in operation around the world. One of the biggest threats that
we face in the world right now is the threat of a nuclear-armed
Iran, and one of the actions that we have taken in the Congress
is to impose sanctions on Iran, which have been putting significant
pressure, economic pressures on the country. One of those sanctions is to attack their need for refined petroleum products because
they dont have refining capacity in the country, and it is having
devastating impacts. Cant you just flip that around? Obviously it
is not a comparable situation but it is the same kind of risk, is it
not, Dr. Gruenspecht?

29
Mr. GRUENSPECHT. There is no question that Iran is short on
gasoline and that sanctions on providing gasoline to Iran have had
an impact on their
Mr. CARNEY. So the question really is: Are we setting ourselves
up for that same kind of vulnerability?
Mr. GRUENSPECHT. I guess it is possible butyes, I guess the
concern isagain, it is a hard question to answer but if some of
our capacity is turning out not to be economically competitive, then
there is a cost in terms of maintaining it, so it is a very tough question.
Mr. CARNEY. The question is: What do you do?
Mr. GRUENSPECHT. What do you do, right, and that is more for
the policymakers.
Mr. CARNEY. Thank you.
Mr. MEEHAN. Well, thank you, Mr. Carney, and I want to thank
our two original panelists for their testimony. The Members of the
committee may have some additional questions for the witnesses,
and if they do and if they are submitted to you, I ask that you will
respond in writing within 10 days. So I want to dismiss this panel.
I thank you for your preparation and your participation by both
gentlemen. We are grateful for the attention you have paid to these
issues and for your continuing work and effort in helping us to better understand, and I hope we can count on your continued diligence and attention because as Mr. Carney pointed, the very implications, the decisions that are being made in theory have real-time
implications to this community because people are making decisions today based on their assessments of the overall market, and
those decisions impact peoples lives, peoples jobs, and this community. Thank you for the work that you have done and will continue
to do.
I now at this point in time would like to call to the chair Mr.
Drevna and Mr. Robert Greco. Mr. Greco and Mr. Drevna, we are
going to take about a 3-minute break. Mr. Carney has a question
he wants to ask somebody, and we will hold for a moment. Thank
you.
[Recess.]
Mr. MEEHAN. The committee will now reconvene. I would like to
recognize the two additional witnesses that we have before the
committee today. Mr. Fitzpatrick, I am grateful for his participation this morning. Mr. Fitzpatrick has to participate in his own
hearing in Washington, DC, later on today, and I am grateful for
him taking the time to be with us for the first half of the hearing
this morning, and I will be joined by Mr. Carney for this final
panel.
First, let me introduce to you Mr. Charles Drevna. He has been
the president of the American Fuel and Petrochemical Manufacturing Trade Association since 2007. He joined the association in
2002 as executive vice president and director of Policy and Planning. Mr. Drevna has worked with the executive committee, board
of directors, and staff to implement a rebranding effort that emphasizes the way association members serve American consumers and
increase Americas economic and National security. Before joining
the association, Mr. Drevna had multiple positions focused on
United States energy production including the director of State and

30
Federal Government Relations for Tosco, the director of Government Regulatory Affairs for Oxygenated Fuels Association, the vice
president at the Jefferson Waterman international consulting firm,
the director of Environmental Affairs for the National Coal Association, and the supervisor of Environmental Quality Control for the
Consolidated Coal Company.
I would like to also recognize Mr. Robert Greco. Mr. Greco is the
group director for Downstream and Industry Operations at the
American Petroleum Institute where he is responsible for managing oil and natural gas issues pertaining to exploration, production, marine, and related industry operations. Prior to his ascension to group director, Mr. Greco served as the American Petroleum
Institutes director for Policy Analysis. During his more than 20year career at the American Petroleum Institute, he also served as
the director of Global Climate Programs and as the director of Marine Transportation Segment. Before joining the American Petroleum Institute, Mr. Greco was an environmental engineer with the
United States Environmental Protection Agency with expertise in
automotive emission control technologies.
For each of the panelists, once again I would appreciate if you
would summarize your submitted testimony and do your best to
keep your statements within the time allotted. So I now recognize
Mr. Drevna for your testimony.
STATEMENT OF CHARLES DREVNA, PRESIDENT, AMERICAN
FUEL AND PETROCHEMICAL MANUFACTURERS

Mr. DREVNA. Chairman Meehan and Congressman Carney,

thank you for giving me the chance to testify here at the hearing
today.
I am Charlie Drevna. I am President of AFPM. Until recently,
we were the National Petrochemical and Refiners Association. We
represent high-tech American manufacturers who use oil and natural gas to make almost all the fuels, heating oil, and petrochemicals used in our Nation. In total, we represent over 98 percent of
U.S. refining capacity as an industry.
Our industry is a very competitive business. Our members not
only compete with each other but with foreign refiners who are
able to competitively sell finished petroleum products to areas in
the United States. The increased competition, market and regulatory costs coupled with the decreased demand have created significant challenges for refiners throughout the country. The effects
of such challenges have been seen first-hand here in the Northeast.
So the question is: Why, and what can we do about it? Well, as
I mentioned, the high cost of crude oil, the struggling economy, foreign competition, new Government regulations, uncertainty about
future Government regulations and U.S. monetary policy have all
been factors in the refinery closures. Just on one example, the U.S.
monetary policy, a May 2011 report from the Joint Economic Committee found that weakening of the dollar since 2008, which declined 14 percent, added $17.04 per barrel to the price of oil. So I
think that might be able to answer some of the questions that were
asked earlier about what is the difference between 2008 and now.
It has been a significant global pressure. Remember, the value of
oil is based on the value of the dollar.

31
The recent U.S. Energy Information Administration report notes
that the refinery closures leave the Northeast dependent on imports from outside of the region. Some of this supply can be replaced by refineries in the United States. However, EIA notes that
significant logistical challenges make it difficult to get finished
product, finished petroleum products to the Northeast. Such challenges could eventually lead to supply disruptions and increase our
need to import gasoline from Europe and Asian markets, most notably, India.
The United States must work to ensure that it has the critical
refining infrastructure necessary to not only produce the fuels that
this country needs but could get them where they need to go. The
erosion of such infrastructure raises the same energy concerns that
we have with crude oil. Government policy debates often focus on
our heavy reliance on crude oil imports. We dont want a similar
trend to occur in relation to finished petroleum products. The fact
that the EIA notes a significant portion of the new supply to the
Northeast could come from Europe and Asia highlights the fact
that U.S. refineries, especially here in the Northeast, is becoming
less competitive in the global market.
Given the critical nature of petroleum-based fuels to our economy, the competitiveness of our domestic refining assets is certainly an important energy security issue, but there is also a homeland security issue too, and it is these good people sitting behind
me. We need to keep people working in this country. That is a National security issue. We have to do everything we can jointly to
work together to figure a way out of this and work on policies that
make us stronger, not weaker.
So the technological advancements in developing unconventional
crude from shale plays like Utica, Bakken, and Eagle Ford can significantly increase light sweet crudes available to Northeast refiners.
Again, going back to some of the Q&A from the first panel, these
refineries that are closing have to use the Brent crude. They have
to use light sweet crude. They are not capable as some of the refineries in the Midwest and in the Gulf Coast of using a wider array
of crude oil, and again, if you go back to 2008 where the price of
crude went to $147 a barrel, all crudes went up accordingly. Here
in 2011, 2012, we have seen the price of Brent, because of what we
talked about earlier, all the unrest and the global demand, other
crudes havent gone up as much. Therefore, the Midwest and the
Gulf Coast are much more competitive in the global market.
So these policy decisions regarding shale production need to encourage the development of infrastructure that will facilitate greater access to these crudes. Additionally, our regulatory structure
needs to be realigned to mitigate some of the overly costly and conflicting regulatory challenges American refineries face.
If I may go over another 15 seconds, and I hope we can get into
this more, Congressman, you talked about the renewable fuels and
the Energy Independence and Security Act of 2007, it is hurting
American refiners. It is hurting employment in these refineries and
it is not doing anything to help National security. We have got better ways to do it, and I hope we can talk about that in Q&A too.
Thank you for your time, and I look forward to your questions.

32
[The statement of Mr. Drevna follows:]
PREPARED STATEMENT

OF

CHARLES DREVNA

MARCH 19, 2012

I. INTRODUCTION

Chairman Meehan, Ranking Member Higgins, and Members of the subcommittee,

thank you for giving me the opportunity to testify at todays hearing on the implications of refinery closures for U.S. homeland security and critical infrastructure safety. Im Charlie Drevna and I serve as president of AFPM, the American Fuel & Petrochemical Manufacturers.
AFPM is a 110-year-old trade association that was known as the National Petrochemical & Refiners Association until earlier this year. Our association represents
high-tech American manufacturers that use oil and natural gas liquids as raw materials to make virtually the entire U.S. supply of gasoline, diesel, jet fuel, other fuels,
and home heating oil, as well as the petrochemicals used as building blocks for
thousands of vital products in daily life. Most of our members do not have any crude
oil and natural gas production operations. While we do not specifically represent the
units of companies that explore and develop oil and natural gas reserves, our refining and petrochemical manufacturer members require a steady, secure supply of oil
and natural gas, which is vital to our businesses and our Nations economy and National security.
AFPM members make modern life possible and keep America moving and growing
as we meet the needs of our Nation and local communities, strengthen economic and
National security, and support 2 million American jobs. The entire oil and natural
gas sectorincluding the producers of oil and natural gassupports more than 9
million American jobs and pays more than $31 billion a year in taxes to the U.S.
Government, plus additional funds to State and local governments. According to a
recent report from the World Economic Forum/HIS CERA, the oil and gas extraction
industry added 150,000 jobs in 20119 percent of all jobs created in the United
States that yearmany of which were created here in Pennsylvania.
Contrary to what one might read in the headlines, however, the refining industry
is a very competitive business and our members compete not only with each other
to provide the highest quality fuels at the lowest cost, but also with foreign refiners,
who are able to competitively market fuels in some areas of the country. Increased
competition and costsincluding both market and regulatory costscoupled with
falling demand have created new challenges for American refineries. Unfortunately,
the Northeast has experienced the effects of these challenges first-hand, as three
Northeast refineries have closed due to a combination of the factors in the last 3
months alone. For the 2,000 employees and about 750 contractors associated with
those facilities, and more than 36,000 jobs supported by the refineries economic activity including restaurants and other small businesses, these closures are a tragedy. AFPM urges Congress and the administration to ensure an overly burdensome
regulatory environment does not worsen the economic situation and lead to further
refinery closures, layoffs, and weakened U.S. energy security.
II. REFINING SECTOR CHALLENGES THAT ARE LEADING TO CLOSURES

High crude oil costs, a struggling economy, foreign competition, new Government
regulations, and an uncertain regulatory future have created significant challenges
for an already competitive refining industry and led to the announced idling and
potential closure of several East Coast refineries.
The three East Coast refineries represent more than 713,000 barrels per day
(b/d) of domestic refining capacity. In addition, Sunoco announced that it will have
to close its 335,000 b/d Philadelphia refinery if it cannot be sold by July. In an Open
Letter to the Community published as a newspaper advertisement, Sunoco President and Chief Executive Officer Brian P. MacDonald wrote: Despite the best efforts of Sunocos refinery employees, our Northeast refinery business has lost nearly
$1 billion in the past three years. The primary factors contributing to Northeast
refining closures include both market conditions and Government policies:
Crude Costs.Crude oil feedstock costs are a refiners largest expense and not
all crude oil is the same. Northeast refineries were built to use light sweet
crude oil as their feedstock to manufacture fuels and other refined products. Absent a multi-billion dollar investment in new equipment and procuring the environmental permits authorizing such modifications, these refineries cannot use
lower-cost sour crude, making them uncompetitive with refineries using the
more affordable crude. There are many factors driving up the price of crude oil,

33
including global unrest, increasing demand, tightening supplies, speculation,
and a weakened U.S. dollar. A May 2011 report from the Joint Economic Committee (JEC) found that the weakening of the dollar since 2008, which declined
14 percent, added $17.04 per barrel to the price of oil (Brent Crude) (Exhibit
A).
Decreased Demand.Fuel demand is down in the United States. U.S. gasoline
demand peaked at 9.29 million barrels per day in 2007 and is projected to decline 16 percent in the next few years. This decline in demand has created 2.4
million barrels per day of excess capacity in American refineries. Such demand
drops are attributable to the recession, higher Corporate Average Fuel Economy
(CAFE) Standards and the Renewable Fuel Standard (RFS). The RFS alone has
displaced 10 percent of Northeast gasoline supply and nearly 10 percent of the
U.S. gasoline supply. Increasing CAFE standards will likely generate an additional 13 percent reduction in demand Nation-wide, or an amount equivalent to
18 refineries.
Regulatory Expenditures.The U.S. refining sector is facing a blizzard of costly,
and in some cases conflicting, regulations that threaten its competitiveness in
a global marketplace. Many of these regulations carry little environmental benefit. A Department of Energy report issued in March 2011 concluded that the
cumulative burden of Federal regulations was a significant factor in the closure
of 66 petroleum refineries in the United States in the past 20 years (Exhibit
B). The impact of regulations will be discussed in more detail later on in this
testimony.
In a recent report, the U.S. Energy Information Administration (EIA) notes that
these refinery closures will leave the Northeast and other parts of the East Coast
dependent on refined product imports from outside of the region. Some of this lost
supply could be replaced by refineries in other regions, since there actually is more
than ample supply of finished petroleum products in the United States. However,
EIA notes significant logistical challenges pose sizeable hurdles to getting finished
petroleum products to the Northeast. Such a reality could create supply disruptions
and require increased imports from Europe and Asia, notably India.
Gasoline supply in the midcontinent faces a different set of factors. New oil discoveries on private lands in the Bakken region spanning North Dakota and Montana have provided midcontinent fuel manufacturers with a more affordable (but
still expensive) source of crude oil. Lack of port access or infrastructure throughout
the region can also somewhat mitigate the threat of foreign competition.
Compared to the rest of the Nation, consumers in the midcontinent area have actually benefitted from this abundant crude supply, experiencing gasoline prices
much lower than the National average in many States (see Exhibit C). However,
these costs are still high and the region is also not without its challenges. The rapid
expansion in regional crude oil production has actually created a bottleneck in the
regions main crude oil distribution point of Cushing, Oklahoma. This bottleneck has
made the actual crude oil slightly less expensive for refiners in this region, but the
bottleneck has created a lack of pipeline capacity needed to get the oil out of the
distribution center. Given these circumstances, crude oil has had to be sent out of
Cushing via rail cars at a cost significantly higher than pipeline shipments. Such
costs, as well as time lags in crude shipments, have contributed to area prices being
higher than the historical average. TransCanada recently announced plans to build
a portion of the Keystone XL pipeline expansion, from Cushing to the Gulf Coast.
This will help alleviate some of the bottleneck in Cushing, but will be inadequate
in the long term.
The market policy and infrastructure factors impacting the American fuel supply
have created a high-cost environment that hampers our Nations economic recovery
and threatens our critical refining infrastructure. Unfortunately, Government overregulation is making matters even worse. Proposed new regulations and unnecessary tightening of existing standards threaten to raise energy costs for every American consumer, with little or no environmental benefit. They would also have the
unintended consequence of strengthening the competitive position of foreign refineries and petrochemical manufacturers, which may lead to additional job losses for
America, weaken the U.S. economy, make America more reliant on nations in unstable parts of the world for vital fuels and petrochemicals, and ultimately endanger
our National security.
III. IMPACTS OF REGULATION ON AMERICAN COMPETITIVENESS

AFPM supports sound and sensible environmental and other regulations. Our
members are strongly committed to clean air and water, have an outstanding record
of compliance with Environmental Protection Agency and other regulations, and

34
have invested hundreds of billions of dollars to dramatically reduce emissions measured by EPA.
As a result of these emissions reductions by our members and by other industries,
Americas air today is cleaner than it has been in generations. Refiners have cut
sulfur levels in gasoline by 90 percent just since 2004. We have also reduced sulfur
in diesel fuel by more than 90 percent since 2005 and reduced benzene in conventional gasoline by 45 percent since 2010.
EPA data shows that total emissions of the six principal air pollutants in the
United States have dropped by 57 percent since 1980 and ozone levels have decreased by 30 percent. These reductions occurred even as industrial output and the
number of vehicles on the road have increased. EPA data indicates there will be
continued reductions in the years ahead under regulations already in place.
Despite the substantial progress we have made in environmental stewardship
under the Clean Air Act and other laws, we are concerned that EPA and other agencies have, at times, made unreasonable and often conflicting demands on our members without a full cost-benefit analysis. In particular, our members spend a great
deal of capital complying with regulations that generate little to no benefit for the
environment, capital that could be used to strengthen our Nations refining infrastructure and create new American jobs.
The three recent refinery closures are, unfortunately, just the latest examples of
a long-term trend. As previously mentioned, a Department of Energy report issued
in March 2011 concluded that the cumulative burden of Federal regulations was a
significant factor in the closure of 66 petroleum refineries in the United States in
the past 20 years (Exhibit B). The manufacturers of fuels are being hit with a regulatory blizzard that poses a significant threat to both refinery operations and our
Nation. Some of these regulations involve what are called Tier 3 regulations to reduce sulfur in gasoline, greenhouse gas regulations under the Clean Air Act, lengthy
permitting delays, requirements under the Renewable Fuel Standard involving ethanol and other biofuels, and logistical hurdles involved with transporting fuel (such
as the Jones Act) to name a few. While each of these regulations poses significant
individual costs, many of these requirements conflict with one another, creating
compliance issues and increasing fuel costs.
Tier 3 & CAFE
The Obama administration is considering a mandate to lower the amount of sulfur in fuels in order to achieve its greenhouse gas (GHG) tailpipe and CAFE standards, known as Tier 3 gasoline standards. The industry has been successful in reducing sulfur levels in gasoline by 90 percent since the EPA Tier 2 standard was
implemented in 2004. While achieving this level of performance came at a high
costnearly $10 billionachieving the next additional small incremental reduction
EPA is contemplating could come at a much steeper price tag with little to no environmental benefit. In fact, EPAs own data indicates air quality will continue improving under the existing Tier 2 standards. Furthermore, achieving the incremental sulfur reduction would require massive new capital investments in equipment that emits more carbon dioxide, which is in direct conflict with EPAs mission
of reducing GHG. As a result of these new costs, independent analysis indicates Tier
III sulfur reductions could result in a 9 to 25 cents per gallon increase in the cost
of manufacturing gasoline. In addition, these costs could lead to as many as seven
additional refinery closures.
Recent EPA testimony indicated the agency is considering scaling back its Tier
3 proposal to focus solely on sulfur reductions. While EPAs statement is encouraging, the tailored rule would still impose a high-cost, minimal-benefit regulatory
requirement on Americas already heavily regulated fuel supply. It could lead to significant domestic fuel supply reductions, higher petroleum product imports, potentially increased consumer costs, increased refinery emissions, closed U.S. refineries,
and reduced energy security. As Americans struggle with high gas prices and high
unemployment, EPA should not promulgate any new regulations that will exacerbate either situation.
AFPM fully supports market-driven efficiency gains for fuel economy. Consumers
want more fuel-efficient vehicles, but they also want affordable vehicles. Unfortunately, Government-imposed CAFE standards are driving up the cost of vehicles
and placing new demands on U.S. refiners. In particular, while auto makers are
given offramps if standards are unachievable, refiners are nonetheless forced to
make massive capital investments to produce new fuels for a fleet of vehicles that
may never exist. The 2004 requirements for refiners to produce 15 parts per million
(ppm) ultra low sulfur diesel (ULSD), for example, was to enable the widespread
adoption of nitrogen oxides (NOx) absorbers on trucks. Ultimately, the vehicle manufacturers determined that those absorbers would not work and instead chose an

35
alternate technology that could function with 50 ppm sulfur fuel. Yet refiners were
still required to produce 15ppm ULSD, resulting in much higher costs to achieve
identical environmental benefits. Governments involvement in the fuels market always creates unintended consequences, and the impacts are felt by U.S. refiners and
consumers alike.
EPA GHG Regulations
Although the Clean Air Act (CAA) was never intended to regulate global emissions of greenhouse gases (GHGs), EPA is nevertheless moving forward in regulating such emissions within the framework of this statute. The agency is proceeding with these regulations even though EPA Administrator Jackson has said
several times that they will do nothing to address global concentrations of GHG
emissions. In the absence of a comprehensive global approach to GHG emissions,
imposing these burdens on the United States would unilaterally cripple the ability
of U.S. manufacturers to compete on a world market against other nationsnotably
India, China, and Brazilwith less stringent environmental regulations.
EPAs regulations will encourage companies to export jobs rather than products,
and in the case of fuel, force the United States to increase its dependence on imports. EIAs report on East Coast refining indicates Americas competitiveness is already at risk. The report notes supply shortfalls in the Northeast are more likely
to be made up through Indian imports than from other U.S. refiners due to U.S.
infrastructure restraints, such as the saturated Colonial Pipeline that supplies the
Northeast fuels market with products from the Gulf Coast. Overregulation is a significant factor in this threatening trend. Losing American manufacturing jobs and
weakening our vital manufacturing sector will harm the American economy and
American workers.
Permitting Delays
The existing permitting process delays important projects for years and significantly increases costs, oftentimes making it uneconomical to pursue new projects.
The most recent victim of regulatory delay is the Keystone XL pipeline, which has
been studied by Federal reviewers for more than 3 years, and which is being required by President Obama to undergo yet further study.
Getting more U.S. and Canadian oilalong with oil from North Dakota and Montanadelivered to Gulf Coast refineries via Keystone XL would add to the world
oil supply and make us less reliant on oil from unstable parts of the world, increasing U.S. energy security and by extension our National security. This would help
remove the uncertainty about future supplies that is a factor in the recent rise of
oil prices. Unfortunately, the administration has held up approval for the pipeline
for more than 3 years. After President Obama rejected approval of the full Keystone
XL pipeline until a new study is completed, Canada is now investigating construction of a pipeline from oil sands deposits in Alberta to the Pacific to ship its oil to
Chinese and other Asian ports. The cost of crude oil is the single largest cost for
refineries, and every additional dollar our members spend on an expensive supply
limited by Governments (in)action is a dollar our members cannot spend upgrading
facilities to handle new types of crude or building out other infrastructure. Streamlining permitting processes and increasing domestic production are vital to keeping
American refineries running and creating jobs.
General Burden of Continuously Tightening CAA and Other Environmental Regulations
The $128 billion that U.S. refiners have spent since 1990 to comply with Federal
environmental regulations adds significantly to their costs of manufacturing fuel.
Refiners supported, and continue to support, many of these regulations that were
clearly beneficial to the environment. However, as environmental standards are
tightened, often with de-minimus effects on emissions, the cost to meet those standards increases exponentially, threatening the global competitiveness of American
fuel manufacturers.
Sunoco notes in its Open Letter to the Community regarding its Northeast refinery closures that environmental regulatory costs consumed approximately 15 percent of its operating budget. Similarly, over the last 10 years ConocoPhillips invested 100 percent or more of its profit into its Trainer refinery in the Philadelphia
area to meet regulatory requirements before idling the refinery last year. The refinery also lost money in each of the previous 3 years. Finally, a Hovensa refinery that
shut down in the U.S. Virgin Islands was located in a region that was in attainment
with the Clean Air Act. EPA was nevertheless requiring the company to spend an
additional $700 million replacing turbines. After losing $1.3 billion in last 3 years,
the refinery could not afford the additional regulatory compliance costs and decided
to instead close its doors.

36
Finally, there has been a great deal of attention recently on the future of electric
vehicles as the future of transportation. It was recently reported that the United
States is pursuing a trade case against China over its practices related to rare earth
minerals, a vital component of hybrid car batteries. The same reports note that
China controls 97 percent of the worlds supply of rare earth minerals. As Congress
and the administration seek ways to increase our energy security, economic security,
and National security, AFPM urges policymakers to weigh the full spectrum of
trade-offs. While weaning the United States off oil is a good talking point, artificially forcing the market to adopt expensive new technologies that rely on the fair
trade practices of China could bring a new set of challenges. In the meantime, the
United States can instead develop its own abundant supply of energy, which can
increase our energy, economic, and National security. The United States can do so
without subsidies or mandates, all our industry needs is the room to do it. As we
look to diversify our energy sources, we must not turn our back on petroleum-derived fuels that we will continue to depend upon for decades to come. To do so would
simply disadvantage the consumer, harm our National economy, and erode our energy security.
IV. DOMESTIC SUPPLY DEVELOPMENTS COULD REVIVE STRUGGLING NORTHEAST
REFINERIES

The increased production of domestic unconventional oil and gas, along with the
growth of Canadian oil sands shipments to U.S. refiners, creates the potential for
a resurgence of petroleum production and refined petroleum products throughout
the United States. The technological advancements in developing these unconventional resources could, as early as 2016, increase North American output by 3 million barrels per day (mmb/d) and decrease waterborne crude imports by 4 million
barrels per day (mmb/d). The increases in upstream production creates opportunities for U.S. refiners to improve the security of crude oil supplies, reduce operating
costs, and increases their likelihood of being competitive in the global marketplace.
Increased access to competitively priced North American oil from unconventional
domestic shale plays in areas such as Utica, as well as Williston Basin, Bakken, and
Eagle Ford, could increase access to light sweet crude oils for Northeast refiners,
replacing more costly imports from less stable regions. Additionally, the increase in
natural gas production is not only providing greater feedstocks for petrochemical facilities, but is helping refineries decrease their operating costs due to less expensive
energy costs.
While some hurdles still remain, further development of unconventional shale formations in Ohio could provide northeast refineries with low cost domestic light
sweet crude oil. Preliminary estimates by Ohios Department of Natural Resources
(ODNR) suggest that the recoverable reserves within the Utica formation are between 1.3 and 5.5 billion barrels of oil in addition to 3.8 to 15.7 trillion cubic feet
of natural gas. Increased interest in Utica shale oil and natural gas formation, along
with the proper pipeline infrastructure, could significantly increase access of light
sweet crudes for purchase by refiners in the Northeast region of the United States.
V. CONCLUSION

The U.S. refining and petrochemical industries are American success stories that
are nevertheless facing new challenges. Despite supporting millions of jobs and positively impacting our trade balance, a storm of high crude costs, increased competition, decreased domestic demand, and overreaching Government regulations have
forced several refineries to close.
Still, these challenges are not insurmountable, and with the help of Congress and
the administration, Americas oil and gas industry can lead to a resurgence in U.S.
manufacturing, increase our energy security, and continue to create jobs here at
home. AFPM recommends:
Fully develop domestic supplies of energy.Contrary to the claims of the critics
of fossil fuels, America is not energy-poor; rather, we are energy-rich. There is
a treasure trove of oil and natural gas under our feet and off our shores
enough to make America the biggest energy producer in the world. Our challenge is not to find this buried treasure or to extract it, but rather to convince
the Federal Government to reverse its current energy policy and allow the development of these resources in a safe and environmentally responsible manner.
Reduce the impacts of overregulation.AFPM recognizes that Government has
the responsibility to balance the demands of protecting public health while fostering the competitiveness of U.S. business. AFPM supports sound environmental and other regulations that strike the appropriate balance between environmental and economic stewardship. Unfortunately, the size, scope, and cumu-

37
lative burden of current and impending regulatory activity is creating both significant regulatory uncertainty and a slew of conflicting regulations that will
impose significant burdens on domestic fuel manufacturers, which further decreases our National security and makes American refiners less competitive.
A robust domestic fuel industry is vital to U.S. National security. AFPM and its
members stand ready to work with Congress in the administration to grow our domestic energy security, strengthen our National security, and create jobs while protecting our environment to build a better life for Americans today and a better future for the generations that come after us.
EXHIBIT A

38
EXHIBIT B

EXHIBIT C

Rocky Mountain States Are Currently Paying $0.50 Less Per Gallon of Gasoline
Than National Average.National Avg: $3.74/gal, Wyoming $3.17/gal ($0.56),
Colorado: $3.19/gal ($0.55), Montana $3.28/gal ($0.46) (AAA, 3/1/12).
Lower Gasoline Prices Due to Access to American and Canadian Crude Oil.
According to a report by the U.S. Energy Information Administration (EIA), low
gas prices in Rocky Mountain States are because of their easy access to cheap

39
crude oil produced in the U.S. Bakken region or imported from Canada (EIA,
2/14/12).
North American Oil Boom Is Driving Down Prices v. Rest of World.North
American crude oil sells at a discount compared to world prices. West Texas Intermediate (WTI) is averaging $18 less per barrel than the international North
Sea Brent price. Bakken crude has sold as much as $28 per barrel less than
WTI crude (EIA, 2/29/12).
East Coast States Rely on Higher Priced International Crude Supplies.Because they lack the pipeline infrastructure to access cheaper U.S. and Canadian
crude, East Coast refineries must use more expensive international Brent crude
to make gasoline (IntlBusinessTimes, 3/1/12).
Higher East and West Coast State Gas Taxes Do Not Explain Higher Prices.
For example, New York drivers pay $0.27 per gallon more in State gas taxes
than Colorado drivers. Yet, gasoline costs $0.78 more per gallon in New York
than Colorado. That is still a $0.52/gal. difference.

Mr. MEEHAN. Thank you, Mr. Drevna.

Now I turn to Mr. Greco for testimony.
STATEMENT OF ROBERT GRECO, GROUP DIRECTOR, DOWNSTREAM AND INDUSTRY OPERATIONS, AMERICAN PETROLEUM INSTITUTE

Mr. GRECO. Good morning, Mr. Chairman and Mr. Carney. My

name is Bob Greco and I am Downstream Group Director for the
American Petroleum Institute, API. Thank you for the opportunity
to testify today.
The API represents all aspects of Americas oil and natural gas
industry. The industry supports 7.7 percent of our economy, 9.2
million jobs, and millions of Americans who hold ownership stakes
through pension funds, retirement accounts, and investments.
Refineries are critically important to our Nation. They make the
fuels that virtually all Americans use and that drive our economy.
They contribute to our energy and National security, and they provide jobs for tens of thousands of Americans and substantial revenue to local, State, and Federal governments.
The recent refinery closures here in Pennsylvania are of great
concern. They have the potential to impact families, communities,
and other manufacturing industries, and to reduce tax revenues.
We very much regret that situation. It is also important, however,
to understand the reasons why refining is such a challenging business and why closures sometimes occur, and to also know that the
refining industry is resilient and will continue to supply the products people in this area and all Americans need.
Refining is highly competitive. It has also historically been a lowprofit-margin industry faced with a heavy slate of regulations involving many billions of dollars in environmental investment and
compliance costs. Because of these and other factors, some refineries often after sustained periods of financial losses had to shut
down. About 75 U.S. refineries have closed since 1985. As this has
happened, however, the remaining larger, more efficient facilities
have expanded capacity so the total U.S. refining has actually increased by 13 percent. The ability of our industry to add capacity
and deliver larger amounts of gasoline and other products over a
flexible distribution network and to also draw on imported products
when necessary will help us continue to provide Americans the
fuels they need.
The higher prices we see now also have been a challenge for refineries. Rising global demand and Middle East tensions have

40
pushed the cost of crude oil higher. This cost is the single biggest
factor in the price of gasoline, accounting for about three-quarters
of the price at the pump, excluding gas taxes, and is the largest
cost incurred by refineries. Refiners have struggled to pay these
high raw material costs to make products for Americans when demand has been relatively weak because of the recession. This has
severely pushed down margins and has negatively affected all refineries.
Good policy choices mean sensible regulations, fair taxes, and
sufficient access to crude oil from all of the refined products that
we make. Decisions made in Washington, DC, are a big part of the
equation but so are those made by local and State governments.
Excessive rules can help raise cost and make it harder for our refineries to compete and stay in business. Policies such as those embraced by the current administration that limit crude oil production in the United States or prevent ready supplies from being imported from Canada can help drive up crude oil prices that eventually affect refineries and those who consume the gasoline, diesel,
and other products they make.
That is why we have been calling on the administration for a
change of course. We have urged them to expand access to Americas vast oil and natural gas resources on public lands that could
also add supplies to markets and help drive down prices. We have
urged them to approve the Keystone XL pipeline, which could deliver from Canada very large additional supplies of crude oil to U.S.
refineries that serve U.S. markets. We have called for more sensible, cost-effective regulations that show a practical regard for the
potential impacts on the industry, its employees, and those who depend on the products they make. We have asked the EPA in particular to reconsider a virtual blizzard of new, poorly-thought-out
or unnecessary rules that affect our refiners including, for example,
a rule that forces refiners to blend into gasoline advanced biofuels
that do not yet exist or pay a fee for not doing so. We have challenged billions of dollars in proposed tax increases on an industry
that already pays vast sums to the Government at far higher effective tax rates than most other industries.
In conclusion, Americas refineries are a critical part of the Nations industry bedrock and part of the fabric of the communities
in which we operate. They make products that are absolutely indispensable to America and they are vital to our National security.
Our policymakers must understand this for this vital sector of our
economy to continue serving America the best that it can.
Thank you, and I look forward to your questions.
[The statement of Mr. Greco follows:]
PREPARED STATEMENT

OF

THE AMERICAN PETROLEUM INSTITUTE (API)

MARCH 19, 2012

Good morning. My name is Bob Greco and I am group director of Downstream

and Industry Operations for the American Petroleum Institute (API). Thank you for
the opportunity to speak at this hearing today.
API represents all aspects of Americas oil and natural gas industry. The industry
supports 7.7 percent of our economy, 9.2 million jobs, and millions of Americans who
hold ownership stakes through pension funds, retirement accounts, and investments.

41
Refineries are critically important to our Nation. They make the fuels that virtually all Americans use and that help drive our economy. They contribute to our
energy and National security. And they provide jobs for tens of thousands of Americans and substantial revenue to local, State, and Federal Governments.
The recent refinery closures here in Pennsylvania are a matter of great concern.
They have the potential to impact families, communities, and other manufacturing
industries, and to reduce tax revenues. We very much regret that.
Its also important, however, to understand the reasons why refining is such a
challenging business and why closures sometimes occurand to also know that the
refining industry is resilient and will continue to supply the products people in this
area and all Americans need.
Refining is highly competitive. It has also traditionally been a low-profit margin
industry faced with a heavy slate of regulations over the decades involving many
billions of dollars in environmental investment and compliance costs. Because of
these and other factors, some refineriesoften after sustained periods of financial
losseshave had to shut down. About 75 U.S. refineries have closed since 1985.
As this has happened, however, the remaining larger, more efficient facilities have
expanded capacity so that total U.S. refining capacity has actually increased by 13
percent. This has allowed the sector to continue to reliably provide Americans with
the fuels they need.
The ability of our industry to add capacity and to produce and deliver larger
amounts of gasoline and other products over a flexible distribution networkand
also to draw on imported products when necessarywill help us continue to supply
markets here.
The higher prices we see now also have been a challenge to our refineries. Rising
global demand and Middle East tensions have pushed the cost of crude oil higher.
The cost of crude oil is the single biggest factor in the price of gasolineaccounting
for about three-fourths of the pump price excluding gasoline taxesand is the largest cost incurred by refineries.
Refiners have struggled to pay these high raw material costs to make products
for American markets at a time when demand has been relatively weak because of
the recession. This has severely pushed down margins and has negatively affected
all refineries.
Refining is a difficult business. But we can make better energy policy choices that
can help the industry remain a reliable, stable supplier of affordably-priced fuels
and keep its workers employed.
Good policy choices mean sensible regulations, fair tax policies, and sufficient access to the crude oil from which all refined products are made. Decisions made in
Washington, DC, are a big part of this equation, but so are those made by local and
State governments.
Excessive rules can raise costs and make it harder for our refineries to compete
and stay in business. Policiessuch as those embraced by the current administration over the past 3 yearsthat limit crude oil production in the United States or
prevent ready supplies from being imported from Canada can help drive up crude
oil prices that eventually affect refineries and those who consume the gasoline, diesel fuel, and other products they make.
Thats why we have been calling on the administration for a change of course.
Weve urged them to expand access to Americas vast oil and natural gas resources on public lands that could also add supplies to markets and help drive down
prices.
Weve urged them to approve the Keystone XL pipeline, which could deliver from
Canada very large additional supplies of crude oil to U.S. refineries that serve U.S.
consumers.
Weve called for more sensible, cost-effective regulations that show a practical regard for potential impacts on industry facilities and to the people who work there
or who depend on the products they make.
Weve asked the EPA in particular to reconsider a virtual blizzard of new, poorlythought-out or unnecessary rules affecting our refining sector, including, for example, a rule that forces refiners to blend in gasolineor pay a fee for not doing so
advanced biofuels that do not yet exist.
And weve challenged billions of dollars in proposed tax increases on an industry
that already pays vast sums to the Government at far higher effective rates than
most other industries.
The U.S. oil and natural gas industrys earnings are in the billions, it is true, but
the industrys profit margins, or earnings per dollar of sales, are in line with other
U.S. manufacturing industries. What our companies earn goes to investing in new
production and new facilities, running our companies, paying our employees, and
delivering more than $86 million a day to the Federal Government in revenue.

42
These earnings also provide a fair return on investments to our ownersthe tens
of millions of Americans who own our companies in their 401(k)s and IRAs or receive income from Government pension funds invested in oil and gas stock.
Americas refineries are a critical part of the Nations industrial bedrock and a
part of the fabric of the communities in which they operate. They make products
that are absolutely indispensable to America. They are vital to our National security.
Our policy makers must understand this for this vital sector of our economy to
continue serving America the best it can.
Thank you.

Mr. MEEHAN. Thank you, Mr. Greco. Thank you, Mr. Drevna. I
now recognize myself for 5 minutes of questioning.
We just had the analysts on whose responsibility it is to sort of
dispassionately assess the facts. You work in this industry. I want
to understand why is it that we are seeing global demand for energy increase, greater utilization of these natural resources in developing countries as well, and yet right here in the United States
here on the East Coast, here in Marcus Hook, we are losing our
refineries. Mr. Drevna.
Mr. DREVNA. Well, fortunately, I cannot be dispassionate about
it because the industry that I represent and the people we employ
are all part of the big picture, so there is going to be a little bit
of passion. The problem, sir, is that we dowe cant separate ourselves, the global economy from the local economy. As Bob said, 76
percent of the cost at the pump is the barrel. Another 12 percent
or so is taxes. So we are married to the price of crude. Now, when
you look at what happened, as the other economies around the
world are expanding right now, as a matter of fact, if you look at
what is happening in India, look at what is happening in China,
and even with 54 nuclear reactors being down in Japan, they are
adding another 286,000 to 300,000 barrels a day of demand just in
Japan, so that again isthere is not that much of a cushion between world-wide production of crude and the demand.
Now, here in the United States, we have an ample supply of fuel.
Why? Well, because we went through awe have gone through a
recession. Who knows what the real unemployment number is?
People arent driving. They are changing their driving habits. We
are adding 10 percent ethanol and other things to the gasoline,
which took away 10 percent of our market right off the top. So
when you add up all those things, the simple answer is, these refineries are in a very, very tough competitive business and going
forward they are looking at the capital investment they would have
to make just to stay even with environmentalI mean, Sunoco
itself said they lost how many billions of dollars over the past
Mr. MEEHAN. Are they making similar kinds of investment in
India and other places?
Mr. DREVNA. Oh, India has made a huge investment in taking
that reliance refinery upwards to a million barrels a day but they
are not doing it under U.S. rules. Right now, if I may use the term,
they are salivating at what they can do.
Mr. MEEHAN. But you pointed out that what we have is roughly
a global balance at this point in time. While we may have a little
bit of excess currently because we are in a situation in which we
curtailed our utilization of energy here in the United States. I am
sorry, did I misstate it?

43
Mr. DREVNA. No, you are right. Well, there is roughly a balance
of crude supply in the world. We have more than ample supply in
the United States right now to service the needs as the economy
is today. Now, we hope the economy increases.
Mr. MEEHAN. As the economy is today, but what happensand
I will get to you, Mr. Greco, because I want you to answer that
question I asked initially, but I want to follow up on this line of
questioning. What happens right now if we are in a circumstance
in which we now have to rely more on these refineries overseas and
they make the determination that they want to steer this product
towards another country, towards their ownIndia is refining
more for India. China is refining more for China. We are now not
only trying to compete for global access to the oil but, once we get
the oil, we have to go someplace else to get it refined.
Mr. DREVNA. That is a situation that I dont want to find ourselves in, Congressman. It is a terrible situation. You know, if we
want as a Nation, as we should, to be less reliant on foreign
sources of crude oil, why would we want to put ourselves in a predicament of being more reliant on foreign sources of refined product. So, you know, but it is not a simple yes or no. It is what can
we do as a Nation working together to make sure that that is minimized and the things that I have outlined, opening up access to our
own resources, taking a look at these regulationsBob hit on a
couple of themlet us sit down and say which ones are necessary,
which ones have gone too far, and for our industry, which ones are
conflicting. Greenhouse gases versus tier 3 sulfur. Cant do both. It
is a dichotomy of the regulatory scheme. So let us sit down and figure out how to keep Americans working, how to keep refineries
running, and how to make our country economically and Nationally
secure.
Mr. MEEHAN. Mr. Greco, I didnt give you a chance. I asked a
question and then I got into a long litany with Mr. Drevna, but I
would like you to respond to that particular question I asked at the
outset or any comments with regard to Mr. Drevnas observation.
Mr. GRECO. I will just add to what Charlie said. You have to look
at the long-term prospects for growth in the United States. Even
though our economy is recovering, the EIA and others have projected basically flat U.S. demand or dropping U.S. demand for refined products. So when you are looking at refineries who are investing for 10, 20, 30 years out, they are looking at what their future demand looks like, and they are looking at a plateau, maybe
a drop-off after that.
Mr. MEEHAN. I see testimony from you that you expect the demand for refined products to decrease here in the United States by
some 18 percent.
Mr. GRECO. Well, this is EIA testimony. I am citing EIA projections. We dont project future growth but EIA and others have projected a flattening demand, and some a decrease. So when you
have a surplus of refining capacity, which we do in the United
States, you can understand why we have had a trend of refinery
closures for the past 30 years. The refineries are growing, the more
efficient ones are growing, but those that are at risk will continue
to be at risk because of the outlook going forward.

44
Mr. MEEHAN. Is that a flattening demand due to things like the
CAFE standards which are going to generate as well as I am assuming the second factor of a flattened demand. When we are talking about demand, when we are talking about demand for refined
products so that does not include the ethanol, which is
Mr. GRECO. That is one of the primary drivers is the fact that
you have a 10 percent ethanol mandate that is increasing over
time. You also have CAFE standards. The fuel economy standards
have gotten tighter so vehicles will get more efficient and continue
to get more efficient over time. So the combination of increased renewables and increased vehicle efficiency are going to offset the
economic
Mr. MEEHAN. Let me ask one point. At what point in time do we
start toyou know, we have reduced sulfur emissions almost 90
percent since we began these. But at what point in time do we keep
making demands of higher and higher standards at which point
some of them stop gaining their advantage but what we are losing
the ability here to keep our refineries open.
Mr. GRECO. Well, we have already reduced 90 percent of the sulfur in gasoline. As Charlie mentioned, there is a tier 3 proposal
that EPA is working on that would reduce gasoline sulfur even further. We have not seen a justification for that rule or any cost-benefit analysis. So our feeling is that this is yet another cost that
hasnt been justified to the industry. Let us see a justification for
this before we go ahead and move forward with such an expenditure.
Mr. MEEHAN. My time is expired. I will turn to my colleague, Mr.
Carney.
Mr. CARNEY. Thank you, Mr. Chairman.
I have been scratching my head all morning about the economics
of these global petroleum markets and how they really affect what
we are here today to talk about, which is the refineries here along
the Delaware River, and I am still scratching my head. I thought
I just heard you say that supply is up, demand is down in the
United States, you know, basic economics, prices should be down,
prices are going up. You also said that the refining industry is basically tied directly tomarried, I think you saidwas to the price
of crude oil. So it seems to me the issue really is the divergence
between local supply and demand versus global supply and demand
for crude oil as well as the divergence between the kinds of crude,
because otherwise, everything ought tofirst of all, they shouldnt
be going up. Basic economics. This seems like health care. It is the
only other market that doesnt work like a market where driven by
supply and demand. So why is it, if supplies are up and demand
is down, prices are going up?
Mr. DREVNA. Well, again, Mr. Carney, you have to differentiate
Mr. CARNEY. It cant be related to things that are happening, you
know, prospectively, right? It has to be related to things that are
happening today.
Mr. DREVNA. Well, first of all, again, you have to make the differentiation. We talked about supply and demand. You have to differentiate the supply and demand of the global crude market,
which dictates 76 percent of the cost at the pump

45
Mr. CARNEY. Right. So given the price of crude, that would suggest that demand is far outstripping supply because the prices
just
Mr. DREVNA. Well, there are a lot of things that go into the price
of crude on the global market, none of which we control.
Mr. CARNEY. So it not an operating market that we learned
about in our economics class where supply and demand determines
price?
Mr. DREVNA. No. You mentioned earlier, you know, you had the
Arab Spring, you have the potential for something happening sometime this June in the Middle East. We dont know exactly what
that is. The price today is dictated upon what people believe is
going to be in the future.
Mr. CARNEY. So given that reality, so then the concept of energy
independence should be a good goal, right? You said yourself that
why we would want to be dependent on supply of foreign crude?
For the same reason, why would we want to be dependent for the
supply of foreign refined products? I happen to agree with you on
both cases.
Mr. DREVNA. I agree. Now, let me give you an if. Right now all
the imports that we take in of crude oil, and let us differentiate
crude from finished product. Crude oil, 53 percent non-OPEC, 47
percent OPEC, and that 53 percent non-OPEC is mostly from Canada, etc. If we would just have the President sign a document that
says we can build the Keystone pipeline that adds 700,000 barrels
a day, that will knock off 12 percent of OPEC crude coming into
this country.
Mr. CARNEY. Well, as I understandwe had this conversation
with the first panelis that those supplies are going to go to the
Gulf Coast and be exported.
Mr. DREVNA. They are not going to be exported. What is going
to be exported isthe 700,000 barrels a day will be refined in the
United States by United States refineries operated by United
States citizens and workers. It will be distributed
Mr. CARNEY. How is that going to help these refineries right here
along the Delaware River?
Mr. DREVNA. Well, again, they are
Mr. CARNEY. The answer is: It is not, because the problem is not
that. The problem is the difference between the cost of refining the
different types of crude, correct?
Mr. DREVNA. That is true.
Mr. CARNEY. So explain to me what has happened over the last
several years that have made these refineries lose money and other
refineries obviously not lose money that enabled them to stay open.
Mr. DREVNA. The difference in the price of crude in the regions.
If you look at
Mr. CARNEY. That doesnt make any sense, because if the crude
is the same
Mr. DREVNA. It is not the same.
Mr. CARNEY [continuing]. It is a function of the price that are
you are getting from the refined product minus the cost of refining.
Mr. DREVNA. But it is not same the crude, sir. It is not the same
crude. East Coast refineries are, as I said, relying upon Brent
crude, most of it coming from either the west coast of Africa or

46
whatever. It is Brent. It is the highest-priced crude in the world.
If you look at my testimony, the chart that says why there is a differential in crudes, why there is a differential in pump prices, the
map that saysthe last page of the testimony, the map that says
where the different crudes are coming from and how they are
priced, that is the difference. In 2008, there wasnt a difference. Everything went up. Every refinery was hurt.
Mr. CARNEY. So that is the issue, the divergence between certain
kinds of crude, right?
Mr. DREVNA. Yes, sir.
Mr. CARNEY. What is driving that?
Mr. DREVNA. International affairs. Again, the refiners and oil
companies have absolutely no control over what the price of crude
is. We are the first customer. We have absolutely no control over
the price of crude.
Mr. CARNEY. Mr. Greco, one of the impacts or one of the factors
that determines the cost of refining is what has to be done in that
process, and you mentioned in your testimony some of the environmental requirements that drive that. Could you talk about the
things that exist today that are driving that, that have negatively
impacted the refineries right here along the Delaware River?
Mr. GRECO. Well, we can talk generally. The fact is, we
Mr. CARNEY. No, I want to talk specifically because I want to
talk about the requirements that have affected the jobs of the people who are sitting behind you and the refineries in particular
here. Because we just determined that in fact there is a difference.
If you are down in Delaware City, they are able to make a profit,
and somebody has come in and has reopened that refinery because
they refine a different kind of crude. So tell me specificallyI see
my time has run out.
Mr. MEEHAN. No, please feel free.
Mr. CARNEY. Tell me specifically what it is that is affecting these
refineries in terms of that refining process and those environmental requirements.
Mr. GRECO. As Charlie pointed out, refineries have varying degrees of efficiency and complexity. Some refineries are more able to
handle the cheaper crudes than others. When you start layering on
environmental regulations, you are increasing the cost of compliance for every refinery. Some refineries because they are more efficient or can take advantage of other synergies such as cheaper
crude may remain more competitive. But at some point the least
competitive in any industry to the extent that more and more requirements are layered on those, the least competitive players are
going to drop off, and that is what I think we are seeing in the
United States.
Mr. CARNEY. So I heard that when Mr. Drevna said that in his
I am sorry. My time is up.
Mr. MEEHAN. No, go ahead. Proceed with your question.
Mr. CARNEY. So I heard Mr. Drevna say that in his opening remarks, and that suggested to me that there was some investments
that maybe werent made in these refineries to make them efficient, competitive, or some differentiation between these refineries
and other refineries, low sulfur, sweet crude, that were picking up

47
the slack and that were able to be successful. Are you aware of
those investments or the reasons they are not competitive?
Mr. GRECO. We cant comment about individual companies who
made individual decisions to invest or not invest. What we have
seen is that there has been
Mr. CARNEY. But you would say that they must not have made
investments or they must not have done what was necessary to
make them as efficient and as competitive as somebody else in the
marketplace, without naming names.
Mr. GRECO. Each refinery is unique. They each have their own
unique processes, the types of crude they buy. So you cant compare
individual refineries. The companies that own those refineries are
making the decisions to determine for the next 20, 30 years what
do I need to do to remain competitive. In some cases, you had refineries expand. There have been a number of expansions in the Gulf
Coast in the Midwest where companies spent billions of dollars to
increase the size of the refineries. Some of those are to take advantage of the heavier crudes coming from Canada, the ones that
Charlie mentioned that are sold at a discount. Because they are already configured to handle these heavier crudes, they are taking
advantage of their size and also their complexity to maximize their
competitiveness. Again, other refineries have made other decisions
to close.
Mr. CARNEY. Thank you. I see my time is long expired. Thank
you, Mr. Chairman.
Mr. MEEHAN. I didnt want to stop you. You were on a roll, Mr.
Carney. I appreciate your questioning.
I want to ask a follow-up question or two, but before I do so, the
Chairman wants to recognize State Representative Maria
Donatucci is here today. She has been a great partner from among
the many elected officials on the State and the local level who have
worked in collaboration addressing this issue, and I thank you for
being here.
Let me ask a question. You talked about the discrepancy that exists or the valuation difference that exists because we have a large
deposit of the Bakken crude that is in the mid-continental region
that is stranded to some extent and therefore, as I understand it,
they are charging less at this point in time, and, you know, a gallon of gasoline in Colorado is 35 to 50 cents cheaper than it is here,
maybe 25 cents cheaper, but it is cheaper there. What are opportunities are there for our refineries to take advantage of this kind of
an asset and be able to take the town workforce and the resources
that we have to develop that deposit and compete in the same manner that is being done mid-continent?
Mr. DREVNA. Mr. Chairman, we need to be serious about developing our own infrastructure. Again, if you look at that map, we
are pretty good going north-south here with oil crude transportation with the noted exception of the bottleneck at Cushing which
we hope in a short time frame will be alleviated somewhat, but if
look east-west, we dont have a great transportation system, and
you really dont have to go as far as Bakken, and as I understand,
they have already railed Bakken crude into Albany and then piped
it down to some refinery here for test runs. But you have Utica in
Ohio, which is the same quality, and it is right there. You know,

48
will it keep these refineries open? I cant predict anything like that.
Can it? Would it be a significant impact if the refineries on the
East Coast could have access to domestic sweet crude? Yes, I think
we could do some good things, and that is why I say, develop our
own resources and build our own shovel-ready infrastructure.
Mr. MEEHAN. So it would be a factor of infrastructure would be
the kind of a thing. Any other policy issues with respect to things
that would make it conducive for us to be able to compete for the
opportunity to access that?
Mr. DREVNA. Well, it is on private land so it is being developed,
but, you know, getting pipelines, getting rights-of-way, permitting.
If anybody wants to stop it and delay it, they can and they have.
Mr. MEEHAN. Mr. Greco, do you have any thoughts on that?
Mr. GRECO. One additional comment. As Charlie mentioned,
most of the development is currently on private lands. That is
where we have seen the tremendous growth. We could use administration support for further development on the public lands, the offshore, the on-shore public lands. Markets react to signals from the
administration and others as to future supply. So not just the current supply, but if we see a willingness to increase and be committed to developing our own resources, markets will react. We
have a good example of that back in 2008 when crude was averaging $130 a barrel. President Bush announced that he was lifting
the moratorium, the Presidential moratorium on off-shore development. Over the next 6 weeks, the price of crude oil dropped by $16
a barrel. I am sure there were other factors involved in that but
markets react to price signals. They react to the intent and what
they see for future expectations of supply, and this administration
could be much more supportive and send similar types of signals
to the market.
Mr. MEEHAN. I dont know the answer to this, but I do know that
Virginia was talking about developing or seeking permission to develop their energy resources off-shore. Is that the same kind of a
crude? Do we know if that the same kind of a crude as the Bakken
crude that would then be able to be perhaps even closer to a resource like our refineries here on the East Coast?
Mr. GRECO. It could be. We have not had the opportunity to explore. We cant even assess the resource.
Mr. MEEHAN. How do we know that there is oil down there?
Mr. GRECO. We have information from the USGS that is going
on 10, 20 years old about potential resources. What happens then
is we open up areas for leasing. Companies have a financial incentive to go in there and actually assess the resource to make a decision whether they should drill or not. But with 90 percent of our
coastlines off-limits, we dont even have the opportunity to explore
those areas.
Mr. MEEHAN. Do you have any thoughts, Mr. Drevna? Do you
have a comment?
Mr. DREVNA. As a matter of fact, not only the opportunity but
Congress passed a law forbidding us to even inventory. That was
2002 or 2003.
The other thing, and to expand a little bit on what Bob was referring to about sending the market a signal, well, twice now in the
past 11 months or so, there was a signal sent to the market, albeit

49
I would suggest it was the wrong signal when we released 30 million barrels of crude oil from the SPR last July and the price of oil
went down $2, $3 a barrel in 1 day. It lasted for a couple days because we released 30 million barrels, which is like 9 hours on a
global market. Last week, the President and Prime Minister Cameron were talking about releasing some oil from the SPR, and the
price went down $2 like that. Imagine
Mr. MEEHAN. But is that all just for people who are sort of speculating and trying to play the game as to what is going to happen?
Mr. DREVNA. Well, but that sends a signal to the market. Imagine if we would do Keystone, if we would open up access, if we
would, as Congressman Carney and I talked about, really focused
on our own energy, if not independence, on our own energy security, what kind of message that sends to the international markets,
that A, America is determined to be energy and economically and
Nationally secure, and B, we are going to be something about it
now. You know, we could have this same conversation, Congressman, next year because it is going to take 4 years to do it, and we
could be having the same conversations as more and more refineries are closing throughout the country.
Mr. MEEHAN. I am concerned about the earlier testimony that
suggests that we may be looking at even additional refinery closings, but I am struggling with this concept that we keep off-shoring
this capacity because once we lose this capacity, we will be dependent upon, to the extent that we are able to access our own, but to
the extent that we have to turn to foreign countries for the ability
to refine it even if we get it here is a concern of mine, unless you
tell me that we are continuing to develop capacity sufficient to
meet our supply.
Mr. DREVNA. I watched steel mills in my hometown up and down
the Monongahela and Ohio River close when I was growing up. We
dont want that to happen anymore.
Mr. MEEHAN. Mr. Carney, do you have any follow-up questions?
Mr. CARNEY. Well, I would just mention the fact that I am
pleased that the steel mill that is in the town that I grew up still
exists right down the right here in Claymont, and it is not run by
an American company anymore but it still operates and produces
steel in global markets that maybe are somewhat uncompetitive.
I am still scratching my head. You mentioned that markets react
to price signals. The problem seems to be that prices dont seem to
react to markets in the way that we were taught in the textbooks
in the petroleum industry, and that is why I am still at a loss to
explain or to understand why these refineries that are here in our
region are not competitive, that were losing money, according to
Sunoco management at the rate that they were, and other refineries around the country refining, as you just said, the same kind
of crude were more efficient and were able to make a profit or at
least stay in operation.
What concerns me the most particularly this morning, because
this hearing is a Homeland Security hearing, we are having it here
because Congressman Meehan has prevailed upon his colleagues on
the committee to allow us to do that, and I have been able to participate because he was able to get unanimous consent for that. So
I come back to the one thing that you said a minute ago, Mr.

50
Drevna, which is: Why? If we are trying not to be reliant on foreign
crude oil and all of the National security implications that that has
had and all the problems it has created for our country going back
as long as I have been paying attention, and in fact the impact it
has on the value of the dollar. If there is one thing that affects the
dollar, it is the fact that tens of hundreds of billions, trillions of
dollars flow out of this country to countries around the world and
affecting the value of the dollar more so than I would argue than
some of the impacts that you mentioned.
I think the issue for this morning, though, is: What does the closure of these facilities mean for our own security here in our country? My conclusion is that it is not a good thing, that it is going
to make us more reliant, not just on crude coming from overseas
but also in refined products and that those supply chains are going
to be subject to terrorist attack. They could be subject to political
shutdown just like we imposed on the state of Iran with respect to
their activities there in that region, and I dont see how you can
concludeI know we had the Homeland Security representative in
the first panelthat this is not a really negative thing for the security of our country. Mr. Drevna, I agree with you that we ought to
be doing what we can to make sure that these facilities are able
to operate here and operate profitably. But it appears that we are
subject to the whims of the marketplace that dont seem to be driven by the supply-demand price equations that I am familiar with,
and that doesnt require any response, but I want to thank you.
What I would ask you, though, I guess Mr. Greco in particular, to
list those things, you know, environmental constraints and imposed
costs on the refining process, particularly ones that do not give us
any kind of benefit or a benefit that justifies the cost that they impose on the system.
Mr. GRECO. I would certainly be happy to respond.
Mr. CARNEY. Thank you.
Mr. GRECO. Also, we can give you some information that does
show that diesel and gas prices do mirror crude oil prices. If you
look at NYMEX, it is very much a stair-stepso when you talk
about the markets dont react like a typical market does, in reality,
it really does mirror the price of crude oil.
Mr. CARNEY. You dont agree with that statement?
Mr. GRECO. I would prefer to clarify it for you.
Mr. CARNEY. Fair enough. I am not an expert, but I just watch
what happens at the pump.
Mr. MEEHAN. Well, thank you, Mr. Carney, and I thank our panelists, the witnesses for your valuable testimony. Either these
Members or other Members from the committee may have questions, and if they do and they are submitted to you, I ask that you
respond in writing. The hearing record will be open for 10 days to
do so, and so without objection, the committee stands adjourned.
[Whereupon, at 12:11 p.m., the subcommittee was adjourned.]